Commercial Real Estate: How Coronavirus Could Change the Landscape in 2020 & Beyond
Are you afraid?
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I’m not usually afraid. But I am afraid now.
I’m afraid to pen this article.
You’re probably thinking that there are a lot bigger things to fear out there right now, and you are correct. But here’s why I’m afraid…
Uncertainty Is Everywhere
Everything we “knew” a week ago is old news. And everything that we (all) confidently asserted for the past months, year(s), or decade(s) seems to be out the window.
Are you with me on this? We simply don’t know what we don’t know.
Think about this. When your tenants paid their previous rent checks, just five or six weeks ago, most of them were employed and probably had little more than passing concern about this virus. And even as I write this…
- The stock market’s ghastly plunge has not really impacted landlords… yet.
- The government hasn’t enacted strict anti-eviction laws… yet.
- Tenants haven’t sued landlords for creating an unsafe work or living environment… yet.
- The unemployment and underemployment of your tenants haven’t caused a hit to your economic occupancy and civil unrest hasn’t come to your doorstep… yet.
Now, I don’t know if all of this will happen, but who would have ever guessed we would be where we are? A couple months ago, the Dow Jones was approaching 30,000 and multifamily was still almost impossible to acquire at anything close to a sensible price. Banks were giving out loans like candy, and most of us were fraternizing by the coffee machine and planning our summer vacations.
But that seems like years ago now. Right?
So, you can see why I hate to make predictions.
Nevertheless, I will try to give some thoughts on investing in commercial real estate in this coming era. With the hope that BiggerPockets will let me edit this post to avoid embarrassment when things pan out differently in the future. (Editor’s note: Of course, Paul!)
Commercial Real Estate During & After Coronavirus
Watch for Government Intervention
In an era where the government is already involved in almost every facet of our private and public lives, you can bet they will be deeply involved here. In the 2009 meltdown, this meant sweetheart deals like $50 billion of taxpayer money to bail out Goldman Sachs. And a lot of help for mortgage-payers and a host of others.
Will this crisis result in bailouts for tenants this time? What about landlords? Will landlords be penalized for charging full rent to unemployed tenants? How will tenants survive if they can’t pay rent… and how will property owners survive if they can’t evict those who don’t?
Will the federal government take an equity stake in companies that receive a bailout? (This is on the table now.)
You can bet the federal, state, and local governments will be involved on a level like never before. If over 75 percent of voters are non-entrepreneurs, then an anti-landlord stance could play well to voters, and I think we all know that is a major factor here.
Here’s the lesson: Prepare to be flexible, and plan to follow the golden rule. You may actually be the beneficiary in this mess if your competitors take a different tack.
Watch for Media Shaming
You can bet the media will be right alongside the government looking for stories depicting landlords and business owners of all types in the worst possible light. This plays well to the typical portrayal of entrepreneurs as villains.
And don’t think you’re exempt, Mr. or Mrs. Duplex Owner. You could wind up on the front page just like the CEO of a Fortune 500 company.
Let’s be honest… many business owners deserve to be shamed. I just watched Dark Waters, the story of DuPont’s undeniable poisoning of Parkersburg, West Virginia. It made me cry. (My wife grew up a few miles away, and she has suffered the health impacts for decades.) Don’t be one of these entrepreneurs.
Here’s the lesson: Be thick-skinned, but don’t be a schmuck. You are called to love others before you’re called to make a big profit, and I am firmly convinced you can do both (though it is often tough to navigate these waters). Who knows, maybe you’ll even get written up for doing something beautiful.
Watch for Opportunities
Many high-quality real estate assets will become available as the pressure from this unanticipated and unprecedented meltdown squeezes the lifeblood out of commercial real estate owners of all stripes and types.
Marriott's CEO, in an emotional video to employees, said the impact of this crisis is worse than the 2008 meltdown and 9/11 combined. He said the occupancy in the Great Recession was about 75 percent. Now it is about 10 percent.
It is reported that many hotels in China have already permanently closed. I don’t see how this can be avoided here.
And what about restaurants? Retail? Malls? Offices?
Companies worldwide are learning how to run remotely, and even if they don’t lay off anyone in this meltdown, many may not return to office space as usual after the crash.
Your choice of the right asset types will be critical (as always). Those on a downward secular trend (e.g., malls) may be less preferable than recession-resilient assets like mobile home parks and self-storage. We can’t even guess what other asset types will emerge in this crisis.
Here’s the lesson: If you have access to cash, keep your eyes open. Use this time to read, train, and plan. Make friends with bankers and real estate pros. Social distancing is physical, not personal. Assemble your team and plan for an opportunity to acquire that commercial property or business at the lowest prices in modern history.
Watch for New Investors
This may be obvious to you, but have you thought about why the stock market is dropping? It’s because people are pulling out their cash. Many of them have it “under their mattress” and are wondering what to do next.
Plus, the U.S. government and Federal Reserve are pouring money into the system like there’s no tomorrow. (That’s an eerie thought right now.)
Much of this sidelined cash will not be dumped back in the slot machines of Wall Street and will be looking for a new home. Commercial real estate, in a normal world (where we will return one day), provides unparalleled stability and predictability if acquired with conservative underwriting and modest debt.
If you’re planning investments (like syndications) that require a lot of investor cash, you may be able to acquire it from investors who never invested in real estate before. And this, along with my point above (to watch for opportunities), may create an unsurpassed wealth-building opportunity.
But you’ll have to be patient. (The good news here is that you have time to figure this out!)
Here’s the lesson: Educate yourself on the advantages of commercial real estate investing. Choose an asset class, and learn it well. In addition to assembling your team, assemble your tribe, and be prepared to tell your story. Become an authority, and create valuable content. Like a grizzly bear at a waterfall, with its unhinged jaws full of salmon, be the authority that investors will seek out when this crisis abates.
And Until Then…
Stay calm. Love your neighbors. Look for opportunities to slow down and connect with those you love in ways that you may have missed during the many years of prosperity we’ve all experienced.
People often report that their most cherished memories and relationships took place in the midst of crisis, and I am certain this will be no different if we position ourselves well.
Did you hear about the little girl who said, “Mommy, I like coronavirus…’cause I get to spend more time with you”?
You may have opportunities like that, too.
As odd as it seems, this could be the best time of your life and a memorable time for your family. And if you position yourself well, you may have an opportunity to build great wealth on the other side of it all.
Are you a commercial investor? How do you think the pandemic will impact this asset class?
Weigh in below in the comment section.