I had to pause work yesterday to tell my kids, “Hey Guys, stuffed animals do not belong in the refrigerator!” My wife and I are both working remotely and finally finding a groove where we have time to get work done and help people, take care of the kids, walk the dog, and stay healthy. I’ve spent the last three days reconnecting with my network and clients to understand what they are seeing out there. Let me know what challenge you are facing and I’d be happy to help you think through what options you have, what I see others doing out there in similar situations, brainstorming potential solutions and connecting you with people in my network that can shed additional light.
Commercial Mortgage Market
Tom Barrack has put out the best insight thus far on how the commercial market is dealing with the current challenges in the commercial financing space. The link is here. The synopsis here is that there are challenges at every link in the capital stack. Tenant’s that can’t pay, lead to landlord’s that can’t make payments, institutional investors who are getting margin calls, private equity fund commitments being pulled, etc. His advice to more more comprehensive and synchronous preventative action. If you are interested in this part of the market you’ll enjoy the article.
The Irvine Company is the first institutional landlord in the market to get out front of this and start offering 90 day rent relief for it’s tenants in its retail portfolio without being asked. Repayment will be spread out over the 2021 fiscal year.
I have not heard about office landlords agreeing to the same 90 day deferral terms but I know that they are getting the requests and formulating their responses as we speak. What about medical office landlords who have medical tenants that provide non essential and elective procedures? How about industrial buildings?
My experience thus far, and with a brief flashback to the 2007 recession, tells me that there will be a flood of requests from tenants. What you do as a landlord will largely depend on if you have debt to service, your reserve account, and who your investors are. What if tenants stop paying now but your bank isn’t participating yet as legislation on the local level to allow for tenants to remain in their properties is happening faster than legislation on the national level to prompt banks to do the same.
I have already had clients contact their lenders to start a dialogue with them. Early and often is what most experts advise. I have found there generally to be a healthy tension with lenders in that they want to work with you but they also have the ability to call your loan or ask you to put up more collateral.
90 day mortgage relief with no fees or negative reporting is already happening in the single family lending arena. The twist with commercial paper is based on what kind of lending institution you are working with and their source of capital. The more conventional the loan the more likelihood that they will have a deferral solution. Try reaching Chase Bank today and you might find that it takes 5 days to reach someone to talk with.
There are long standing tenants who I advise that are experiencing a halt in their revenue streams are playing out all sorts of scenarios as they hunkerdown. Some have already asked me to get in touch with their landlord’s to start working on rent deferral programs if they are in more extreme situations. These requests are met with varying success depending on the landlord.
“Blend and extend” is the tactic that we brokers utilize when rents fall. This tactic allows us to obtain a new lower rental rate immediately, which provides relief, while extending the lease term, so that the landlord has a longer term of rental income and increased financing capacity. The rub here is that industrial rents aren’t expected to decrease in any meaningful way at this point in time. Could we negotiate a 90 day rent deferral in exchange for another year of term? Would you want to sign up to another year of term right now? What if you needed a shorter or longer rent deferral period? What if you had 1 year left or 5 years left on the initial term. The answer will be specific to the circumstances but that is one of the more prevalent moves in our playbook that helps people.
What about operating expenses? Some are asking for 50% of operating expenses to be paid back later along with the rental repayment.
Some of my medium size clients are making adjustments to their future plans which have lead to sublease assignments, new ways to use and repurpose their internal logistics capabilities, and lease extensions.
On the bright side, some clients are in businesses that are able to thrive in today’s environment because they are in industries that are growing. One client of mine runs a diagnostic laboratory for testing for infectious diseases and received a recent grant from the federal government to make better, faster more reliable testing devices. They still face all sorts of operating challenges, similar to everyone else, but are in a unique position to take their organizational skill set and adapt it to today’s environment to better help people.
Here is a list of Supply Chain articles that I compiled that provide a dozen different examples of what people can do to adapt their supply chains.
Articles is a partial list of what is included:
- How to Secure Your Supply Chain
- Managing Cash Flow During a Period of Crisis
- Is it Time to Rethink Globalized Supply Chains
- Logistics Real Estate Amid the Breakout
- Defending Consumer Products Companies
- How Chinese Companies Have Responded
- How to Build Supply Chains Resilient to Disruption
What are you seeing out there? Please share your perspective so we can better communicate with each other and find better solutions to overcome challenges. Happy to help.