Where To Look for the Best Money-Making Deals
I understand this is a sensitive time and a sensitive topic. There are people all over the world suffering, and I am about to write an article on how us as investors can benefit. I want to start by saying that I truly feel compassion for everyone severely impacted by this pandemic, and by no means want to discount that. Having gone through two prior market downturns, I know what kind of pressure this can cause. Although I wish this was not occurring, I don’t want to close my eyes to the fact that it could create opportunities for those who are prepared. I have thought about writing this article for weeks but have not been able to really piece something together. The reason for my struggle is I am primarily a residential real estate investor, and I honestly do not see an influx of opportunity coming in that product type. With that said, I do think we will see some opportunities in other product types, and possibly residential down the road. Here is what I believe could happen as we claw through this crisis.
Office is likely to be the hardest hit asset class in real estate. With the recent lock-downs, most companies who occupy office space sent their staff home to quarantine. I don’t have the statistics, but there is a high percentage of people who can work from home who are working from home. Offices are pretty much vacant in most cities. So why would a company continue to pay rent when they are not using the office? Well… many are not. Companies all over the country have stopped paying rent on their office space, and most loans for office buildings are owned by business banks with little flexibility on payment deferrals. There are moratoriums on foreclosures spread across this country which could be playing a role, but we are yet to see a wave of foreclosures. That could easily change. As we work through the government stimulus, which is helping office owners, and employers decide to reduce or eliminate office space, more and more office owners will face financial hardship. Compile this with the reduction in property values, and it is going to become challenging for owners to stay current or refinance debt. Personally, I am going to stay away from office, but I do believe there will be some amazing value in the near future.
Because this is going to be the most similar to residential it is an asset class I understand much better. Behind office I believe we will see this area hit the hardest. I know I will get push back on this, and many investors believe neighborhood retail is in trouble, but before you stop reading let me explain. First, I am limiting this argument to class C apartments. Class C would be the lower income buildings. The reason I think this is going to be hit the hardest is because of unemployment numbers. If you dig into the numbers, there is a sad discrepancy. The American’s not working is hardest hit in hospitality and the minimum wage worker. As of today, most of them are making more money on unemployment than they did working, so we have not seen a big drop off in rents paid. That will change at the end of July when the federal piece of the unemployment stops unless the new stimulus plan passes and extends this deadline. The federal piece is $600 per week for everyone on unemployment regardless of how much they were making before they lost their job. When that expires, unemployment payments will decrease to closer to 50% of prior income, which is not enough to support this demographic. Over time, companies will come back and people will regain confidence to leave their home and spend money, but as we wait for that, unemployment will remain a problem and paying rent on this class of apartments will be an issue. Two other areas that will be impacted include small retail that has small restaurants as tenants and self-storage. I think small retail could see a fairly large impact as their tenants struggle to get back in business (many won’t survive), but storage will do better. It is common during hard times to see consolidation of families, so I think it is possible to see smaller vacancy rates and higher rents with storage.
On the residential side, I do not think we will see much change. I believe it is business as usual, at least in the short term. I have written about my opinion on the impact of COVID-19 on housing and have posted videos to our channel, so I won’t go into too much detail here. If you have not yet subscribed to our channel, please do. We are hoping to increase subscribers, and you can help. Although I don’t expect much impact, there is a chance we see an increase in foreclosures in 18 to 24 months. The majority of non-jumbo loans are owned or guaranteed by the government. All loans in this category qualify for automatic forbearance, which I discussed last month. Those agreements expire 12 months after they start and then it will take some time to determine which borrowers can get back on track and which ones cannot. My guess is loan servicers will be much faster with their foreclosures than they were in 2008, so I would expect the problem loans to work their way through the process quickly. Although this is a real possibility, I do not think it is likely. Servicers are given great latitude to work with their borrowers after the forbearance expires, which should prevent many foreclosures. I also believe our economy will be mostly recovered in this time and unemployment will be back to a manageable level. If I am right, it will be business as usual for residential investors. Although I am optimistic, my eyes are open to what is possible.
I hear a lot about the coming opportunities with subject to investing or other owner carry transactions. Although I do think these opportunities are coming, I believe it is much further down the road. I will discuss this in more detail next month.