Notes from the Front Lines from our Chief Investment Officer
Posted on April 15th, 2020
I thought it would be worth giving you an update of what we are seeing from the front lines of the COVID-19 crisis from a real estate perspective. We have conducted multiple surveys and webinars with all the RealtyMogul sponsors over the past two weeks in order to aggregate and share best practices about accessing SBA Programs, managing properties in response to COVID-19, and gathering information about collections.
Real Estate Markets
The real estate industry braced itself over the past week as we attempted to collect rent on an economy that has essentially shut down. Clearly, hotel properties, which have had minimal occupancy, have been hit the hardest. We currently only have one operating hotel in our portfolio, so we don’t have much information on that asset type. Retail has experienced the second greatest degree of pain, however grocers and pharmacies have largely remained open nationwide. Some national retailers have sent out mass mailing to landlords stating that they simply will not pay rent at any location. Local “Mom and Pop” retailers are experiencing significant disruption and may not survive being closed for an extended period. Collections have been as low as 25% at some of our retail centers. Our sponsors have trained their staff to help tenants access SBA assistance. In the office sector, properties with creditworthy corporate tenants have barely seen an impact, while some impacted tenants have requested rent relief. We have not found any national data to benchmark our office, industrial and retail performance.
For the most part, the residential sector has performed better than most expected. Two weeks ago we asked our operating partners to estimate the level of collections they expected to receive in April and the reported average was 65%. Two national studies regarding collections in apartment communities conducted by the National Multi Housing Council (“NMHC”) and Jones Lang Lasalle (“JLL”) provided a slightly different result. NMHC reported, based upon their survey of owners of 13.4 million apartments, that only 69% of tenants paid any of their rent between April 1 and April 5, compared with 81% in the first week of March and 82% last April. The JLL data was slightly more encouraging and was broken down by the quality of apartment. Owners of Class A units collected 87.5% of rent by April 5th, while Class B owners collected 83.7% and Class C collected 76.6%. After analyzing the data, I believe that the JLL data may be higher because it included a very small sample set from the NYC Metropolitan Area, which experienced a significantly below average percentage of collections.
We surveyed our residential sponsors on the level of collections to date and the average was 82.7%. Our sponsors expected to collect an additional 9.1% and predicted write offs of 8.2%. This is significantly better than we expected. In general, we found that communities that were already experiencing collection issues continued to experience collection issues. In accord with the JLL data, our NYC sponsors are experiencing some significant collection challenges, which is not surprising given that NYC is now the epicenter of the global pandemic. However, we were very pleased that some communities have already collected over 90% of rent.
Investment Sales/Acquisition Markets
The Investment Sale market has, for the most part, shut down temporarily. Some transactions that were lined up to close pre-COVID-19 are closing, however, there is very little new activity. We are incredibly grateful that the buyers of three RealtyMogul investments (Burlington, the Palms and Park Bordeaux) honored their contracts and continued to move forward with the closing. However, we also had to make the difficult decision recently to pull the Larkspur transaction. Even up to last week we were still optimistic about the opportunity because it is very unusual to be able to acquire new projects at a value very close to the developer’s construction cost. After the breadth and depth of this pandemic became clearer, we judged that the lease up risk was too much to bear until we see more certainty in the market.
The commercial debt markets at this point are largely frozen. The few lenders that are still in the market are sometimes offering rates higher than before the pandemic began. Several investors have asked me, “Why are rates so high when the Federal Government has dropped rates so dramatically?” When the stock markets plummeted, many institutional bond managers sold heavily to generate cash to protect themselves against margin calls. This was an enormous problem in the 2008 downturn. All that activity caused interest rates to skyrocket across all levels of credit. Spreads have come down slightly but are still significantly higher than when the crisis began and may take some time to stabilize. As a result, the volatility and uncertainly is making it very difficult to obtain a loan. Throughout our portfolio, we had a number of refinancings underway when the pandemic turned more serious in the US and we are pleased that many of them went through and will result in return of capital to investors, including Clover, Village Fair and the Plano portfolio.
We are working hard during this difficult time to prove to you the benefits of having an institutional quality manager acting on your behalf. RealtyMogul is one of the few syndication platforms that pools individual investors and uses the power of the aggregation to gain controls and decision-making rights. While there is cost associated with this additional level of protection and our business model, we aim to maximize value and demonstrate the benefit of RealtyMogul’s asset management value add.
Thank you for your continued support and I anticipate sharing additional insights from the front lines again shortly. Please feel free to reach out to our team with any additional questions.
Chris Fraley, Chief Investment Officer
All information provided herein is for informational purposes only and should not be relied upon to make an investment decision and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. Readers are recommended to consult with a financial adviser, attorney, accountant, and any other professional that can help you understand and assess the risks associated with any investment opportunity.