Commmercial or Residential real estate, which is most effected?

Question

Just came across the article below. The Cheesecake Factory Tells Landlords Across the Country It Won’t Be Able to Pay Rent on April 1. Will commercial real estate be drastically effected? What are your thoughts.

https://www.google.com/amp/s/la.eater.com/platform/amp/2020/3/25/21194144/cheesecake-factory-rent-strike-chain-restaurant

Account Closed · Answer

Cheesecake Factory, though?  For real?  Give me a break.  They're broke in one month?  Everyone should boycott them anyway, based on fat content.

Joel Owens · Answer

Lol... oh all the doom and gloom people pounding on retail. I am on pace for over 7 figures in commissions this year WITH THE VIRUS going on with RETAIL.

There are TONS of buyers buying retail properties folks. These people view the virus as a short term thing. My clients are very affluent some being worth over 100 million but a larger majority around 5 to 10 million net worth.

I think if anything multifamily is going to get their butt kicked in the short term. All of these bills being passed to halt eviction on residential tenants. Residential is likely going to see a huge wave of defaults in the future as these tenants wait on the stimulus to come in. Residential landlords about 80% of them own 1 to 2 properties and if those tenants cant pay rent lots of landlords have to little to no reserves.

My clients might have a few retail vacancies to deal with but they have very deep pockets and will be fine.

In regards to Cheesecake Factory most tenants corporate attorneys are sending out that junk to fish for free rent and see what they can get whether they are really hurting or not.

A way a landlord might handle them is to say we will look at rental deferment for 1 to 2 months and amortize over the next 12 to 24 months on top of existing rent due but to consider this request we require to see financials for your store location etc.

Cheesecake Factory has a very specific large restaurant footprint that can only be located in a few spots in their desired market. It's not like they have a 3,000 sq ft box where there are 30 choices to move to if landlord does not give them a bunch of free stuff.

Subway sent out a similar corporate junk letter as well. The goal of the landlord is to see who is just fishing and who is really needing help and creating a WIN-WIN for both parties in the long term.

I love it when people read news stories but do not work the industry day in and day out. Start looking at thousands of retail properties a week and high levels deals and then people can gain fluid knowledge of the retail space.

The cold belt retail states are likely to be hardest hit where they might have more sit down in urban core at inflated rents per foot. Most of the stuff I find desirable is in warm belt states at less rent per ft and is not heavily overbuilt like in  some cold belt states where the population is moving away.

Joseph Cacciapaglia · Answer

It seems that restaurants, gyms, movie theaters, hotels, etc. are going to have a hard time coming back. Even when they're allowed to reopen, I think there will be a lot of people that are still hesitant to be around crowds. People may have also gotten used to eating and working out at home. I would not want to be an owner of lifestyle centers. They've dominated for the past several years, but that probably won't be the case going forward.

I also think there may be a long term negative effect on office properties, because a lot of companies were just forced to figure out how allow their employees to work remotely. This may not be that large, because it seems a lot of employees aren't enjoying working from home. I think this is less certain than the hospitality stuff above. I just bought some of the crushed office REIT stocks.

In my mind housing, industrial/distribution/warehouse, and storage are probably going to be alright. Really this has stressed our supply chain, so we may see some growth in the distribution and warehouse properties.

Joel Owens · Answer

Residential and commercial landlord tenant laws are night and day different and not even close to being the same.

Landlords in commercial mount responses to commercial tenants. Those tenants can possibly look at seeking SBA disaster loans. Additionally landlords for commercial can also use this time to negotiate other components into the lease in exchange for rent deferment.

I would be much more concerned for residential landlord laws and them being given lots of forgiven rent and stay of evictions. Politicians tend to be more in tune with the mass voters and what moves the needle in the future for them with re-election.

Brant Garner · Answer

Lots of investors will take a slight haircut over this. I could give scenarios where certain parts of all asset classes would be negatively effected by this pandemic. Many retail tenants will have access to emergency funds via SBA Loans just like multifamily tenants will get stimulus checks. I wouldn’t hesitate to say that there will be a lot of pent up demand for retail and hospitality once all this gets smoothed out, and it will. Unlike the last recession, real estate and its lending practices aren’t the underlying reason.

Joel Owens · Answer

It depends on the NNN product type. IG (investment grade) is in style. Lessor credit tenants are higher risk in the eyes of the buyer and the lenders right now.

There are tons of 1031 exchanges right now. I have some hotel owners that want to sell out to REIT's and have high quality NNN assets. They are tired of active yield versus passive yield NNN and don't like riding the roller coaster boom/bust cycles. Once people have so much net worth they want STABILITY and good returns that outpace inflation. They tend to not want active assets that when things are great they are excellent but when things are bad returns fall off of a cliff.

NNN STNL under 3 million mainly cash buyers and some with debt about 25% of the time. There are people retiring from corporate jobs, selling off businesses,etc.

REIT stocks you have very little control and those are more cyclical in nature. It's an individual decision and comfort level of the investor and how they process and feel about various investment strategies. I have had some that love owning directly because of A,B,C reasons and then others the opposite because of their A,B,C reasons. Even though investors might have some of the same reasons on their list the Investor 1 might assign importance and risk factor of A at 50% weight and importance and Investor 2 might give 10% weight and importance to it.

I have talked with many thousands of investors over the years and heard just about every theory and proposal with thought process about why they want to make a certain decision.

Adam Nishikawa · Answer

Tenants who have the ability to pay rent and those who can't are taking advantage of the current situation. Landlords who wish to fight back face closed courts and a delayed ability to enforce rent. Even higher credit companies in NNN leases will take advantage of the current situation. Legislation will play a big role moving forward for both residential and commercial properties.

Sam B. · Answer

@Joel Owens

How many of your deals have involved 1031 buyers recently?  Hard to see how people would be willing to pay the same price of an asset before the covid noise vs today..  why would a buyer want to take the additional uncertainty risk?  Look at all the triple net reit stocks trading off 50-75%, I could get similar exposure if I just bought those at a much lower price point.

I just wonder that once the 1031 buyers/sellers burn off, would the market slow?

Scott McElhaney · Answer

Joel, excellent insight.  I totally agree and can relate to what you've said.  Thanks for posting.

Scott McElhaney

Commmercial or Residential real estate, which is most effected?

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