How long will tenants keep paying rent when employment participation in the workforce is at an all-time low, no one wants to go back to the office, no one is traveling for business or leisure, no one can go to a concert or sporting event, or even a restaurant. A temporary change in behavior rarely leaves a permanent adjustment of that behavior, but the longer it prevails the more likely it will become ensconced into daily life.
The problem is that while vaccines may allow people to gather again, many people may not want to do so that quickly and some may never do so again. The challenge here is that the business models built on controlling mass demand, such as high-rise offices, theme parks, concerts, sporting events, air travel, hotels, conventions, restaurants, movie theaters, Broadway theaters, etc. all make money off that critical 10-20% marginal demand. If that is affected permanently, those business models are no longer valid and the corresponding “housing” models that landlords rely on for the rent, no longer work.
For those affected business models, the only solution will be a recalibration. At some point, lenders will have to revalue their real estate so impacted. The value adjustments will severely compromise the borrower’s ability to refinance, most likely resulting in foreclosure if the owner does not provide a substantial cash infusion. There are hundreds of billions in funds standing by waiting for the opportunity to bridge this pending liquidity gap. Whether or not this capital crisis comes and how severely will depend on several factors, not the least of which is whether “not yet” becomes “not ever”. The math does not look good for borrowers if “not yet” drags on deep into the summer.
Hopefully, the combination of vaccine rollouts, a tapering of the contagion, lender forbearance and government intervention may stave off the grim reaper of commercial real estate equity in compromised business models and allow enough time for a slow but steady recovery.
Stay safe, stay healthy and get vaccinated ASAP!