The economic disruption caused by COVID-19 didn’t just lead to some apartment dwellers falling behind in their rent. Commercial tenants who lost significant business or had to shut down altogether for a time were affected, too.
Property managers took a hands-on approach to the problem, dealing with tenants individually to work out payment plans. In some cases, plans have been amended, as pandemic circumstances continue to be fluid.
COVID-19 has presented some real challenges, said Brian Finley, chief financial officer of LMS Commercial Real Estate.
LMS manages office and medical buildings and shopping centers. Overall, that’s about 90?properties, including many grocery-anchored centers, and almost 700 tenants, with the majority of properties in the Susquehanna Valley of Pennsylvania, Finley said.?
A year ago, Pennsylvania Gov. Tom Wolf issued his closure order, and several hundred of LMS’ tenants – which didn’t qualify as essential – had to temporarily shut their doors.
Many were mom and pop businesses, he said. “They were on the front lines of that and didn’t have deep corporate pockets to fall back on.” And when they can’t pay the rent it sets up a domino effect, Finley said, because the landlords who own the buildings need the tenants’ rent to make?mortgage payments on those buildings.
So LMS worked with tenants on a case-by-case basis to come up with strategies, he said. An agreement to defer rent on a short-term basis was a common solution.
“Not unlike other economic downturns, the life cycle of commercial real estate management requires ingenuity,” Finley said. “We had to work a lot of long hours.”
What made this experience and the response time different was the sudden onset, he said. Normally, recessions?result in?a gradual slowdown, but this was like being “knee deep in the ocean with a tidal wave bearing down,” Finley said. “It came all at once.”
LMS didn’t ask if tenants were applying for Paycheck Protection Program loans, but many did, he said. Several paid their deferred rents early because of the PPP funding.
Some large corporate retailers filed for bankruptcy to restructure and reduce store count, Finley said.
Of LMS’ 700 tenants, about 250-300 were significantly affected during the shutdown, he said. Most of the mom-and-pop stores managed to stay in business.
Some merchandisers, including grocery store chains, did really well, Finley said.
Right now, the vast majority of LMS’ tenants are doing better than they were six to eight months ago, he said. “There are still some challenges for?restaurants and bars until the occupancy restrictions are fully lifted,” he said.
Eric Stankiewicz, a property manager with Rock Commercial Real Estate, had similar experiences. Once the pandemic hit, tenants received individual attention to come up with a rent payment plan. For example, Stankiewicz said, the rent could be frozen with the expectation that it would be paid later. Tenants only had to cover base operating expenses. Rock Commercial Real Estate has properties in York County with a foothold in Lancaster County.
Rock’s contract is with property owners, some of whom were able to let rent payments go for a bit. Others can’t be as flexible.
The key is to balance what property owners can afford to give as far as short-term rent reduction and what renters can handle, Stankiewicz said.
“In April and May 2020, pretty much all I did was amendments to leases,” he said. In some cases, with retail tenants, he had to do it more than once. That was mostly restaurants, Stankiewicz said.
The contrast with retail and everyone else was clear. There was less lease modification with office tenants, he said, and industrial tenants were considered essential business, so didn’t shut down.
Michael J. Lorelli, High Associates Ltd.’s senior vice president, commercial asset management, agreed that the pandemic effect depended on the type of real estate.
A developer, broker and manager of office space, industrial real estate, retail properties and apartments in Lancaster, south central Pennsylvania and beyond, High Associates has a managed portfolio that includes major corporate centers located throughout the Eastern U.S.
Lorelli said retail was hit hardest, with a mandatory shutdown and then occupancy-level limits. Meanwhile, industrial tenants were relatively injury free, he said, although some experienced supply chain interruptions.
Like LMS and Rock, High Associates designed custom plans for tenants in financial distress, Lorelli said, and immediately put them in touch with resources, including information about accessing the Paycheck Protection Program, as soon as the need was clear.
In some cases, special payment schedules were set up, or 2020 late charges were waived, Lorelli said.
Last spring, with many businesses reeling either from the lockdown or a drop-off in sales, “we were really concerned,” Lorelli said.
But after working with its tenants and leaning on programs such as PPP, only two of 250 – both retail establishments – closed their doors, he said.
However, if tight restrictions had gone on longer, it might have been a different story, Lorelli said. “We were fortunate.”
Currently, “things are picking up,” he said, with a lot of optimism as vaccine production has kicked into high gear.
Still, what the landscape will look like post-COVID-19 is hard to say. Could employees start returning to the office after working at home, or will office tenants begin downsizing because they need less space?
Even industrial tenants, which did well, had to make adjustments, he said, with some developing more diverse supply chains. That, in turn, will leave them better prepared for future global interruptions.