Man, anybody else feel like they are on a roller coaster?
What an unimaginable time we are currently experiencing. There is an amazing number of unexpected events happening throughout the globe and it all happened within a matter of months. From the US Government printing trillions of dollars to the Energy industry completely collapsing and gas hitting under $1.00 per gallon. It truly is a fascinating time to be living and this will no doubt be an era in time we discuss with future generations.
In the commercial real estate field things are moving so quickly and predictions are changing daily, it seems almost impossible to have clarity at this point. There are so many predictions that I believe most of us don’t really believe anyone anymore.
Given the vast amount of chatter out there in cyberspace, I wanted to write about one event that as a both a broker and real estate owner, I feel is being overlooked. There was something that happened at the end of March and start of April that truly isn’t getting enough attention.
Often in commercial real estate we talk about and use the term “credit”. You will often hear investment brokers say, “The Lease is backed by a “Credit Tenant”…all you have to do is “go to the mail box and pick up your check” or “The credit of a national tenant is going to weather any storm or recession and you, the investor, will have no need to worry about security”
Getting such security historically has come with a price; a very low cap rate. This means that the investor is having to trade return on money for security. This is why, for example, you see many national retailers trade for 4-5% returns. The investors are told that the investment is more secure and well capitalized to weather economic storms.
On this flip side, you will often see shopping centers that are filled with local concepts that we in the industry refer to as “local credit tenants”. These are often neighborhood shopping centers or older shopping centers that line older thoroughfares in markets. Local retailers can’t afford the “main and main” real estate that the national retailers can. These shopping centers are viewed often times as less desirable due to the lack of financial stability.
With that being said, this past month I have talked with dozens of local and regional Landlords to discuss what’s happening with their portfolio amidst the COVID-19 pandemic and how the rent collection went for April 2020.
It was fascinating to hear a common theme throughout my discussions; that more of the “local credit” tenants stepped up and paid their rent compared to the “national credit” tenants.
Like many Landlords, the first “I want abated rent” letters came from national retailers that we ,as investors, paid dearly for in times of crisis. In a time when we were expecting to get our “return on security” we were all receiving letters informing us that rent was not going to be paid or rent was to be abated.
Now we arrive to the discussion point that I feel has been overlooked from a commercial real estate perspective throughout the COVID 19 pandemic and that is that the value of the local business operator has been significantly undervalued. We, as investors, have overlooked the strength and value of passion and pride in local business owners in exchange for the billion-dollar balance sheet of “national credit tenant”.
When S^%T hit the fan, it wasn’t the nationals that stepped up and paid the rent, it was the local “mom and pop” tenants that stepped up and paid the rent. Unfortunately, many Landlords at this time have come to the startling realization that even though national retailers make millions of dollars a year in profit and have billions of dollars in cash, it doesn’t necessarily translate to them “going to the mail to pick up the rent check”.
To be clear, I am not saying every local retailer paid and every national did not. There are several credit tenants that stepped up and some locals who simply did not have the choice due to lack of financial resource.
However, the vast majority of Landlords that I spoke to experienced the same experience when collecting April rent. Even when we, as Landlords, have offered locals a “deferred rent program”, several have told us, “I appreciate it but we will pay the rent and we will get through this…”
To put a ribbon on it, I want to document my experience in this historic time and express gratitude to many local business owners that are going through this unbelievable time. It’s eye-opening and admirable to see the tenacity of local tenants and it makes me proud to help and support them within our real estate portfolio.
Now, the 1st of May is coming up and time will tell how rent collection shakes out but I didn’t want to miss the opportunity to give “credit” to the local retailers who amongst unprecedented times outperformed national retailers.
My heart truly goes out to all the small business owners in this country right now. There is no doubt you will be talked about in history and I, for one, will never question the value you bring to your local retail landscape. When the dust settles and the opens signs click back on, I truly believe the support you receive from your community will be unprecedented.