- Many liability policies may provide coverage for losses incurred from Coronavirus.
- How will the Coronavirus affect single-tenant net-leased investments, and the real estate market generally?
- Should landlords grant 2 to 3-month rent abatements being requested by single-tenants?
- Many liability policies may provide coverage for losses incurred from Coronavirus (Compliments of Anderson Kill).
As the Coronavirus losses mount, a burning question for many businesses concerns the insurance coverage available to ease these losses. Insurance companies can be expected to push back, disclaim coverage, and point to exclusions. But coverage exists for various forms of injury from this pandemic. A review of typical insurance policies held by businesses shows that it would make sense to investigate coverage in multiple lines. And as the government and public responses unfold, coverage terms should be revisited. [Read more (pdf)]
2. How will the Coronavirus affect single-tenant net-leased investments and the real estate market generally?
Single-Tenant Net Leases. As the stock market is in turmoil at this time, commercial real estate may draw investors seeking “safe haven,” with yields higher than current bond yields. Single-Tenant Net Leases (“STNL”) with longer-term leases and with nationally recognized brands should be in a position to weather a downturn.QSRs are still functioning, even with in-house dining restricted through drive-throughs, carry-out, or delivery services. Drugstores remain open as essential businesses. Some drugstores will soon set up testing centers in-house. Grocery stores are seeing higher than average demand, and are having difficulty keeping shelves stocked. Harris Teeter in the Southeast just announced that they will be adding 5,000 new employees to handle the increased activity. Pet stores, such as Petco and PetSmart, are open and are doing a lot of business. Those businesses which will not remain open, and QSRs or fast-casual restaurants whose primary business was in-house dining and who are not prepared to do delivery or carry-out business in the same volume, will suffer.
Some QSR owners are getting two to three-month rent abatement requests from restaurant tenants who are suffering financially during this time. I will speak about that in the next section.
As of today (March 26, 2020), we have not seen a significant movement of cap rates of STNLs in either direction. Cap rates have been relatively stable despite the reduction in Fed rates and the resulting decline in interest rates, and despite the uncertainty of the survival of some STNL tenants if there is a prolonged business shutdown.
The real estate market (other than STNL). Economic conditions are rapidly evolving in the financial markets. The rapid growth of CoVid-19 cases continues to create turbulence in the global economy and domestic financial markets.
As Coronavirus spreads, real estate investors are becoming more cautious. The real estate market in the U.S. is coping with a mixed bag of both positive and negative effects of the outbreak. Overall, real estate remains a trusted long-term investment option in a time when stock prices are falling, and bond yields are at an all-time low.
Expected changes in the residential marketplace:
- Mortgage rates will remain low or even fall further.
- New home construction could slow, exacerbating already short supply.
- Fewer new homes and low-interest rates are likely to put upward pressure on home prices.
- Financial distress could reduce demand for luxury housing, but also create some buying opportunities for those in the market.
An important thing to keep in mind is that now is not the time to panic. The real estate market is stable and will survive this uncertain period. Owners should continue to hold their properties, and weather the storm, buyers should look for opportunities.
3. Should landlords grant 2 – 3-month rent abatements requested by single-tenants?
Many of our clients are getting requests for 2 -to 3-month rent abatements by their tenants. While these are mostly coming from long-term net lease single-tenants, this can also apply to landlords who have multi-tenant properties and are getting similar requests.
We are advising our clients not to give rent abatements, but instead to give rent deferrals. A couple of the solutions we recommend are:
- Give a 2-3 month rent deferral. But have the deferred rent repaid over 12 – 24 months commencing January 2021, or
- Give a 2-3 month rent deferral, but extend the lease for three additional months, so you ultimately collect the deferred rent. In either case, the landlord can decide if he wants to charge interest on the deferred amount, or not.
- As a last resort, if there is no other viable option, then give the rent abatement, so you don’t lose the tenant.
In these unprecedented times, property owners often need to turn to a professional real estate advisor to have their questions answered or to get some sound advice. Our company has been in business since 1978 and we stand ready to assist you with your real estate investment decisions. Feel free to call us to discuss your needs or questions.
On our brokerage side, we specialize in the long-term single-tenant net-leased property market across the country, representing buyers who need to complete a 1031 exchange upleg, or just want to invest in secure, passive, cash-flowing properties. We also represent owners of STNL properties who have decided to market their property.