What’s going on in the world of Commercial Real Estate? In this quick update, you’ll discover what’s happening in three areas of the commercial real estate market as a result of the coronavirus, and who the big winners and the big losers are as of right now (June 2020).
1. Rent Collection Update
Watching rent collections is important because they are an indicator of where the market is at. We have Proteges across the United States and their property reports enable us to follow exactly what’s happening in every major market. In March when the COVID-19 lockdown began, the media was predicting doom and gloom for apartment owners. However, contrary to their prediction, we collected:
- Over 95% of our rents in April which indicates that in April, our tenants still had their jobs.
- In May, we collected 90% which is still good.
- We predict that when our June reports come in over 85% of the rent will be collected.
What does this show us? Even though purportedly forty million people have lost their jobs, apartment tenants are still paying their rent! And when rent collections remain strong, so does the market.
2. Commercial Lending Update
I speak with lenders nationwide nearly every day and we also have Proteges closing deals with financing across the United States, so I have a very good idea of what’s happening with commercial lending.
- Lending is taking a lot longer; sometimes it’s taking two times longer to close deals.
- Lenders are tightening up by asking for higher down payments and requiring more reserves upfront to show that payments won’t default in the next 6 months.
- Interest rates remain incredibly low, as low as below 4% for multi-family buildings.
The rates are incredible, but it’s taking longer to get financing and the cash requirements for down payments and reserves have gone up. Banks are in the business of mitigating risk and they’re doing that right now by tightening lending requirements. We can expect to see this for at least the next several months.
Debt Service Forbearance Update: As you know, the government and now some banks have offered multi-family investors a period of forbearance for three months. Then we would have twelve months to catch up. Yet, when nearly all our proteges applied, they were not approved because they were not distressed enough. They didn’t qualify because they are still collecting rents and have their jobs. This is another indicator that the apartment business is in good shape right now and doing better than anticipated.
3. Investor Mentality Update
We naturally keep a close eye on investor mentality, through comments on my YouTube channel, Commercial Property Advisors website, and daily interaction with our Proteges. We also have a lot of direct communication with property owners due to our outbound marketing campaigns. Gathering all that information together, here’s a brief outline of what we’re seeing as it relates to investor mentality:
Buyer Perspective: Right now, we’re not really seeing a slow down in investors motivated to buy property. There are still plenty of people with money aggressively making offers and buying deals. This means the apartment business is a stable market. So, if you’re brand new to real estate and interested in commercial real estate investing, I suggest you start with apartments. I have a video called How to Buy Your First Multi-Family Small Apartment Building that you can watch to learn more.
Seller Perspective: We aren’t witnessing panicked sellers offering huge price reductions as a result of COVID-19. Some sellers appear to be more motivated amid the pandemic, protests, and recession, so we are getting better deals, but not with major price drops. Most likely we won’t see anything like that either. However, there are some better deals out there than in the past 10 years so now is the time to invest!
Commercial Real Estate Winners and Losers
You can read all the articles, diagrams, and graphs you want but no one can predict the future. We’re figuring it out as we go. That said, I’m going to give you my perspective after being in the business for twenty years.
Biggest Losers
Possibly the biggest losers will be those with cash, sitting on the sidelines and doing nothing when the dust settles. If that’s you, you may look back and see that you missed the best buying opportunity since the great recession. As it relates to commercial real estate owners, here’s what I see:
Shopping Center Investors: With stores closed or forced to reduce occupancy, consumers have moved to online shopping. As a result, some businesses have gone bankrupt while others are still unable to reopen due to economic constraints. As non-anchor tenants defer rent payments, shopping center owners are struggling to pay their mortgage.
What’s more, they don’t have the same bail out protections as homeowners or some apartment loan borrowers. Consequently, when they can’t pay their debt service, they could lose their centers. Because consumers can order online and have their groceries delivered, they may never fully return to physical shopping like pre-COIVD-19 days. Bypassing the anchor terminates the value of renting space near the anchor. So as the anchor loses traffic, the entire center goes. Looking into the future, it doesn’t look hopeful for shopping centers.
Office Building Investors: This area seems to be suffering the most. This is because not only have most people been working from home as a result of lockdown orders, but now, many employers are beginning to permit working-from-home as a permanent option for employees.
Biggest Winners
The biggest winners are going to be the people who invest wisely amidst this turmoil. Certain asset types are going to shine during these dark days.
Apartment Building Investors: Everyone needs a place to live. This is what I and my proteges mostly invest in and it’s for good reason. They’ve been stable through the last three recessions and we’ve always come out shining from those times.
Industrial and Warehouse Property Investors: They are currently performing well and will continue to because they are supplying what we are buying online. Who’s hiring right now? Warehouse and Industrial tenants like Amazon because e-commerce business is booming. Amazon has a company that searches for warehouses around the country and they can’t buy them quick enough. I believe apartment buildings and industrial properties are the big winners today and in the future.
How to Position Yourself for Success in Uncertain Times
How can you position yourself to invest wisely? The most important thing you can do is educate yourself. When you know what to do and how to do it, you will make smart decisions with exceptional results.
The foundation of that education is to complete my free video course: Commercial Real Estate Investing for Beginners
This course is a prerequisite for anyone starting in commercial real estate investing. Upon completing that free course, you will be as educated about Commercial Real Estate as just about anyone you’ll ever meet. Equipped with this knowledge, you’ll know what moves to make to position yourself wisely during these times.
