What's going on in the world of Commercial Real Estate right now? In this brief 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 are very important because they determine where the market is. As you know, we have Proteges all across the United States and their property reports enable us to keep track of exactly what's happening in each major market. When the COVID-19 lockdown began in March, the media was predicting doom and gloom for apartment owners. However, contrary to what the media is saying, we collected over 95% of our rents in April. This means that in April, our tenants still had their jobs. In May, it was 90% which is still good, and we predict that when our June reports come in (June 15th) over 85% of the rent will be collected. What does this tell us? Even though supposedly forty million people have lost their jobs, apartment tenants are still paying their rent! And when rent collections remain strong, so too does the market.
2. Commercial Lending Update
I speak with lenders nationwide nearly every day on what's happening in their world and we also have Proteges closing on deals with financing all across the country so we have a very good beat on what's happening with commercial lending. We are definitely seeing that lending is taking a lot longer. It’s taking sometimes two times longer to close deals. And also as a result of COVID-19, lenders are tightening up. They are asking for higher down payments and requiring more reserves upfront to show that payments won't go in default in the next 6 months. Banks are in the business of mitigating risk and they're doing that right now by tightening their lending requirements.
Interestingly enough though, interest rates remain incredibly low. We're seeing interest rates below 4% for multi-family buildings. So, the rates are incredible, but it’s taking longer to get financing and the cash requirements (both down payments and reserves) have gone up. And we expect to see this behavior for at least the next several months.
Side Note! 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. We then would have twelve months to catch up. However, when nearly all our protege applied, they were not approved. They were not distressed enough and didn’t qualify because they have their jobs and are still collecting rents. This too is a good indicator that right now, the apartment business is doing quite well, and certainly better than expected.
3. Investor Mentality Update
We naturally have a very close eye on investor mentality, be it comments on our YouTube channel, comments on our website and certainly our daily interaction with our Proteges. We also have a lot of direct interaction with other property owners due to our massive outbound marketing campaigns in search of great deals. And taking all of that information together, here's a quick summary of what we're seeing as it pertains to investor mentality:
Seller Perspective: We aren't seeing panicked sellers offering gigantic price reductions as a result of COVID-19. Some sellers seem to have some additional motivated amid the pandemic, protests, and recession, so we are getting better deals, but not fire sales. And we probably won't see anything like that either. But there are definitely some better deals out there than we have seen in the past 10 years so now is certainly the time to be buying!
Buyer Perspective: We're not seeing almost any slow down in investors wanting to buy property right not. There are still lots of people with money aggressively making offers and buying deals. This means a very stable market in the apartment business. So, if you are interested in commercial real estate investing and brand new to real estate, I would suggest you start by pursuing apartments. I have a video called How to Buy Your First Multi-Family Small Apartment Building that you can watch to learn more.
Commercial Real Estate Winners and Losers
Let’s move on to what I believe will be the big winners and the big losers. No one can predict the future. You can read all the diagrams, graphs, and articles you want but no one really knows. 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.
Perhaps the biggest losers are going to be those with cash, sitting on the sidelines and doing nothing when the dust settles. So, if that's you, you're going to look back years later and see that you missed perhaps the best buying opportunity since the great recession. Specifically, as it pertains to commercial real estate owners, here's what I see:
Office Building Investors: Office appears to be suffering the most because most have not only been working from home as a result of the distancing orders, but now, employers of all types are beginning to allow working-from-home to become a permanent option for employees.
Shopping Center Investors: With stores closed (or forced to reduce their occupancy), consumers have moved to online shopping. Some businesses have gone bankrupt as a result while others are still unable to reopen due to financial constraints. As non-anchor tenants suspend rent payments, shopping center owners are sucking wind and beginning to struggle with paying their mortgage. And they don't have the same bail out protections as homeowners or some Apartment loan borrowers so when they can't pay their debt service, they could lose their centers. And looking into the future, it doesn't look pretty for shopping centers. Consumers may never again fully return to physical shopping like pre-COIVD-19, when they can order online and have their groceries delivered. Bypassing the anchor destroys the value of renting space near the anchor. So as the anchor loses traffic, so goes the entire center.
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 mostly invest in and it’s what my Proteges own the most, too. It’s for good reason. They've been stable through the last three recessions and we've always come out shining from those times.
Warehouse and Industrial Property Investors: They are doing well right now and will continue to into the future because they are supplying what we are buying online. Who's hiring right now? Warehouse and Industrial tenants like Amazon because the e-commerce business is booming. Amazon has a company that searches for warehouses around the country and they can’t buy them quick enough. This business is booming right now. I believe apartment buildings and industrial properties are the big winners today and in the future.
How to Position Yourself for Victory
How can you position yourself to invest wisely during these uncertain times? The most important thing you can do is to educate yourself. When you know what to do and how to do it, you will make smart decisions and create extraordinary results. The foundation of that education is to complete my free video course:
Commercial Real Estate Investing for Beginners
That course is a prerequisite for anyone embarking on commercial real estate investing. When you have completed that free course, you will be as educated on the subject of Commercial Real Estate as just about anyone you'll ever meet. And with that knowledge, you'll know what moves to make to position yourself wisely during these times.