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Support for commercial real estate and their tenants
Government efforts to enforce work-from-home rules and restrict gatherings as critical public health measures to control the spread of the virus have had a significant impact on commercial real estate, the companies occupying these spaces, and the people working there. Indeed - physical distancing and orders to stay at home made many office buildings deserted, and many companies postponed their return dates to the summer of 2021, more than a year after the first restrictions were announced.
In the third quarter of 2020, the US recorded a 28.9 million square foot decline in office occupancy - the largest-ever one-quarter decline. Vacancy increased to 16%. Meanwhile, commercial properties and shopping centers were completely devastated.
Given that real estate is the largest illiquid asset class in the world (estimated at over $228 trillion in asset value in 2016) also in terms of the number of people employed directly or indirectly in the industry, governments at the federal, state, provincial and municipality level concentrate significant amounts of financial support related to COVID-19 on this sector. The types of support varied greatly from government to government, ranging from indirect, such as a simple rent deferral and changing eviction rules, to significant direct financial support to landlords (through payments to tenants).
Governments, of course, recognize that maintaining stability throughout the pandemic is required for tenants, owners, building values, property taxes, safety and quality of life in every community. But how effective have these stimulus plans been so far, and what other future actions might governments, landlords and tenants consider - especially in the event of a post-vaccination recovery? In this article, we review various programs around the world, provide a perspective on their effectiveness and the second-order distortions they cause in the marketplace as well as outline some considerations that will help the industry recover from the COVID-19 pandemic and to set it on a successful path in the years to come.
Until now, government funding has come largely from federal sources, where there is greater borrowing capacity compared to hyperlocal sources. Federal funding has generally provided direct support which, unlike generally available support, is time-limited and targeted. For example, this support included stimulus checks directly to employers, which allow companies to spend a small amount of cash on non-employment costs, and checks on tenants themselves, which enable them to continue paying off their rent or mortgage.
Canada, for example, at the start of the COVID-19 pandemic, provided landlords with "forgivable loans" that cover 50% of the rent, the tenant pays 25%, and the remaining 25% of the rent loss is covered by the landlord. The government also extended the period before issuing an eviction order. During the second wave of COVID-19, the Canadian government launched a second rental relief program that covers up to 65% of rent or mortgage interest (related to the changing scale of the revenue impact due to the COVID-19 pandemic). The UK government has requested landlords to extend notice periods before eviction and issued a moratorium on commercial tenancy evictions. The French government, in turn, is offering property owners a tax credit of 50% of the rent abolished for commercial tenants with no more than 250 employees. In Germany, the government has allowed tenants to defer lease payments from 2020 to 2022.
Governments have taken different measures to support commercial properties and their tenants through COVID-19 - with mixed results for both parties. What is the chance for a new approach? The COVID-19 pandemic, the worst humanitarian and health crisis the world has seen in the last 100 years has had a devastating impact on families, livelihoods and economies.
Royal Oakland Limited