Invested in Commercial Real Estate During COVID-19? 5 Key Questions Answered
From whether rents will be paid to whether it's time to swoop in for bargains, here's an overview of topics for concerned investors.
You are now subscribed
Your newsletter sign-up was successful
Want to add more newsletters?
Delivered daily
Kiplinger Today
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more delivered daily. Smart money moves start here.
Sent five days a week
Kiplinger A Step Ahead
Get practical help to make better financial decisions in your everyday life, from spending to savings on top deals.
Delivered daily
Kiplinger Closing Bell
Get today's biggest financial and investing headlines delivered to your inbox every day the U.S. stock market is open.
Sent twice a week
Kiplinger Adviser Intel
Financial pros across the country share best practices and fresh tactics to preserve and grow your wealth.
Delivered weekly
Kiplinger Tax Tips
Trim your federal and state tax bills with practical tax-planning and tax-cutting strategies.
Sent twice a week
Kiplinger Retirement Tips
Your twice-a-week guide to planning and enjoying a financially secure and richly rewarding retirement
Sent bimonthly.
Kiplinger Adviser Angle
Insights for advisers, wealth managers and other financial professionals.
Sent twice a week
Kiplinger Investing Weekly
Your twice-a-week roundup of promising stocks, funds, companies and industries you should consider, ones you should avoid, and why.
Sent weekly for six weeks
Kiplinger Invest for Retirement
Your step-by-step six-part series on how to invest for retirement, from devising a successful strategy to exactly which investments to choose.
There are many questions circulating within the commercial real estate investment landscape as the COVID-19 crisis unfolds. Will the market return to normal soon? When will rents be collected? Am I going to lose my investment?
I’ve gathered some of the most common questions I’ve been asked and have provided answers that will help guide you through the next 90 days.
If I have money tied up in real estate investments, can I tap into the equity to pay bills and my mortgage?
It depends. If you have buildings that have not been critically impacted or if you have properties that are low leveraged, you may be able to tap some of that equity. The challenge now is that the lending market for borrowers is uncertain. There’s money available, but the terms can be prohibitive. For example, some lenders are requiring additional reserves to cover six to 12 months of mortgage payments. Other lenders are prohibiting cash-out loans. For some owners, a line of credit may be the best option.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Additionally, your available equity is predicated on the property’s cash flow and debt coverage, so money may not be as readily available as it had been in the past. Here’s why: If you own commercial real estate, you likely also have tenants, whether they're commercial or residential. The majority of U.S. states have shelter in place orders and/or social distancing restrictions, which may not be lifted until the end of May or early June. Many commercial tenants cannot open their doors because of these orders and may not be able to pay their rent. Residential tenants are profoundly impacted as can be seen by the climbing unemployment figures. The CARES Act as of now provides for enhanced unemployment and a one-time stimulus check, but there is no requirement that the tenants use the funds to pay rent.
Given this uncertainty for collections, I would say that tapping into your investment is going to be more difficult today than it would have been even two months ago.
Should I hold off on new investments, then?
At present, we’re seeing transactions that were already near the finish line closing. Most other real estate transactions are being put on hold, or the closing is being extended by 90-120 days. Collections are a big unknown for many properties right now. Collections and net operating income set the value of the real estate, but just as important, sets the size of your loan.
We’re also seeing across the market, no matter the property type — multifamily, office or retail — there’s a moment of pause right now. As an example, a multifamily acquisition transaction cycle normally takes two months from start to finish. We’re seeing these same types of transactions now pushing their due diligence out to a 90-day period, with 60 days to close after that (five months). If buyers and sellers are willing to cooperate and take current conditions into consideration, deals will get done. They're just going to be a little different than it would have looked like two months ago.
There may be options for opportunistic investing in 2020, depending on how long COVID-19 disrupts the economy. Good buying opportunities could include properties approaching the end of their financing term or those with troubled operations. Loan maturities are “drop dead” dates that force owners to either sell or refinance. Refinance options have become a lot less attractive in this lending environment, which may prompt sellers to just take a discount on sale instead of taking a loan with low leverage and large reserve requirements.
The same goes for owners who are over their heads with failing operations. When property cash reserves and owners’ own resources are unable to float a property through lean times, then owners may choose the better of two difficult options and sell at a discounted price to avoid foreclosure.
Why is asset management such a hot topic right now?
One reason that investors go into sponsored real estate investments is because the sponsor also oversees asset management on their behalf. It’s a passive investing strategy for those who want the benefits of commercial real estate investment, without the hassles of being a landlord.
Asset management is that layer of oversight between the property’s daily operations (property management), and the owner or investor. And now more than ever, asset managers are scrutinizing property operations with the goal of balancing the needs of the property with the goals of the investors.
An experienced asset manager can navigate an investment property through shocks to the real estate cycle. In the event of a pandemic, natural disaster or any other threat to the property, they are prepared to operate in a very conservative mode to protect the investment. Good asset managers also keep an open dialogue to communicate with owners and investors in real time. Examples of communicating effectively could be sending updates on instituting new procedures to protect the health of residents and staff, changes to business plans, or outlining new rent-collection policies.
The impact of COVID-19 is shaping up as a defining moment for real estate asset managers. Some of the weaker asset management teams and sponsors have “gone dark” leaving their investors wondering if rents are being collected or if mortgage payments are being made. The ability to quickly reprioritize the business plan (e.g., stop capital projects to reserve cash) also distinguishes strong, proactive asset managers from more passive counterparts.
Economic fallout of COVID-19 introduces a real possibility of foreclosure for some properties, and inexperienced asset managers may be unprepared for such a challenging scenario.
So, what’s a ‘sponsored investment’?
The term “sponsor” is used to describe the individual or company responsible for sourcing, purchasing and managing a real estate investment — from acquisition through the eventual sale.
First, a real estate sponsor pools together a group of accredited investors and acquires a property. Then, the sponsor continues its investment oversight as an asset manager, overseeing the business plan, driving value and eventually directing the property’s sale.
Typically, investors receive monthly or quarterly distributions throughout the ownership period. In the case of a crisis, such as COVID-19, distributions might be suspended for a period of time in order to build cash reserves. Investors understand that real estate is a long-term investment strategy and will eventually receive funds.
Should I look at real estate over other traditional investment types?
At the end of the day, real estate is a long-term game, with a long-term horizon. When we talk to investors interested in sponsored real estate, we tell them the same thing. Right now is no different, and we're reminding them of this exact same game plan.
Yes, the next six months are uncertain. Real estate and lending markets are not stable at the moment. But, again, commercial real estate investing is about the long term. We know that rents will get paid — perhaps temporarily with payment plans — and property incomes will stabilize. We know we will go back to a normalized model.
When we have that data that rent collections are going in the right direction and the debt markets begin to normalize, my recommendation is this: Move quickly.
-
How Much It Costs to Host a Super Bowl Party in 2026Hosting a Super Bowl party in 2026 could cost you. Here's a breakdown of food, drink and entertainment costs — plus ways to save.
-
3 Reasons to Use a 5-Year CD As You Approach RetirementA five-year CD can help you reach other milestones as you approach retirement.
-
Your Adult Kids Are Doing Fine. Is It Time To Spend Some of Their Inheritance?If your kids are successful, do they need an inheritance? Ask yourself these four questions before passing down another dollar.
-
The 4 Estate Planning Documents Every High-Net-Worth Family Needs (Not Just a Will)The key to successful estate planning for HNW families isn't just drafting these four documents, but ensuring they're current and immediately accessible.
-
Love and Legacy: What Couples Rarely Talk About (But Should)Couples who talk openly about finances, including estate planning, are more likely to head into retirement joyfully. How can you get the conversation going?
-
How to Get the Fair Value for Your Shares When You Are in the Minority Vote on a Sale of Substantially All Corporate AssetsWhen a sale of substantially all corporate assets is approved by majority vote, shareholders on the losing side of the vote should understand their rights.
-
How to Add a Pet Trust to Your Estate Plan: Don't Leave Your Best Friend to ChanceAdding a pet trust to your estate plan can ensure your pets are properly looked after when you're no longer able to care for them. This is how to go about it.
-
Want to Avoid Leaving Chaos in Your Wake? Don't Leave Behind an Outdated Estate PlanAn outdated or incomplete estate plan could cause confusion for those handling your affairs at a difficult time. This guide highlights what to update and when.
-
I'm a Financial Adviser: This Is Why I Became an Advocate for Fee-Only Financial AdviceCan financial advisers who earn commissions on product sales give clients the best advice? For one professional, changing track was the clear choice.
-
I Met With 100-Plus Advisers to Develop This Road Map for Adopting AIFor financial advisers eager to embrace AI but unsure where to start, this road map will help you integrate the right tools and safeguards into your work.
-
The Referral Revolution: How to Grow Your Business With TrustYou can attract ideal clients by focusing on value and leveraging your current relationships to create a referral-based practice.
