Even as storefronts begin to reopen their doors for business across the country, the new coronavirus or COVID-19 continues its worldwide spread. COVID-19 has infected over three million people worldwide, with over 32,000 of those cases in Texas affecting the lives and businesses of many. One of those industries that has seen the effects of coronavirus is real estate. Though many may wonder how real estate investments could change down the road as the pandemic continues, there are certain best practices that could be utilized during this time.
COVID-19 and Real Estate
The age of COVID-19 has proven incredibly challenging for those dealing with real estate investments. Physical distancing has drastically changed the way people live and interact in their homes and businesses. Ongoing effects to curb the pandemic have decreased the demand for many types of real estate, creating an unprecedented crisis for the industry. The longer the disease continues to spread, the more likely there will be transformative and lasting changes in investment behavior.
Real estate investments have generated steady cash flow over the past several years. Since the COVID-19 outbreak, however, this has changed. Service providers are struggling to mitigate health risks for their employees and customers, while many developers can’t obtain permits, face construction delays, and have shrinking rates of return. Meanwhile, many asset owners and operators will have drastically reduced operating income.
Commercial Real Estate Most Affected by Coronavirus
Certain areas of the commercial real estate market have been affected by COVID-19 more than others, including:
Hotels are one of the most affected assets within real estate. Due to ongoing travel restrictions due to the coronavirus, hotel stocks around the world have significantly dropped in anticipation of falling occupancies and room rates.
Malls and other retailers were among the first to be shutdown as local and state governments worked to limit large gatherings. Retailers have been hit hard but are still expected to pay rent during these months.
Industrial activity has reduced significantly in the last several months due to COVID-19. This has led to a very low demand for logistics assets like warehouses, as those involved in e-commerce are the only ones that have been holding high demand during this time.
Office tenants have likely seen the impact of hiring freezes and layoffs. The Federal Reserve has slashed interest rates to 0.0% – the lowest since the 2008 financial crisis – and added $1.5 trillion of liquidity into the banking system.
Because of this impact, large office and commercial lease decisions will likely be delayed or suspended due to coronavirus concerns. Tenants are finding themselves slower to agree on lease signings due to business uncertainty moving forward. Additionally, delays are expected in obtaining building and occupancy permits, and thus getting work performed on time due to COVID-19 related issues. As such, companies have begun citing ‘force majeure’ clauses in order to temporarily delay rent payments amid COVID-19.
Real Estate Investment Best Practices
While concerns plague the real estate field during this uncertain time, certain best practices can be implemented, including:
Purchasing assets below replacement costs
Investors should purchase assets at below the replacement cost or below the cost of purchasing land and building the property from the ground-up. In doing this, rent cannot decrease drastically as new builds will require higher costs to be developed.
Longer lease periods
Leases with longer lock-in periods, where the tenants have provided all the necessary equipment for a house, apartment, or commercial space makes them less likely to vacate. Long-term leases put investors in a better position in terms of building valuation and refinancing. Having strong tenants makes it easier to get loans with lower interest rates.
Leases with lower rent escalations
Signing leases with a yearly escalation of 5% instead of 15% every three years will help lock tenants in, as they will find the increased payments to be more gradual and less aggressive.
Purchase any completed lease assets
Purchasing only completed lease assets ensures the leasing and development risks are fully mitigated. The last thing investors want to be doing is looking for new tenants or dealing with a rogue developer.
Houston Real Estate Investment Attorneys
As COVID-19 continues to impact businesses and real estate at an alarming rate, having the insight of an experienced real estate investment attorney can ease the legal concerns of investors. At Feldman & Feldman, we understand the importance of real estate investments and are committed to helping you through each step of the legal process. If your business needs legal assistance with its commercial property, contact the experienced lawyers at Feldman & Feldman today.