Recognizing, reacting and responding to the pandemic-influenced business world? Done. Now it’s time to analyze the adjustments, plot the trends and project the outcomes. At this point we need to fully understand the changes, and then divine what they mean going forward. NAI Elliott has been closely tracking the impact of the economic turbulence brought on by the pandemic, with its associated orders, closures, freezes and other responses. Here’s a graph that tracks the key performance measures—revenue, expenses and net operating income (NOI)—for 132 of our managed properties, relative to what was projected in their 2020 budgets.
Notice that there are four handwritten comments in the chart; they highlight our key analysis points of the ongoing impact the pandemic has had on revenue, expenses and NOI.
The first note reflects what happened when landlords rushed to the aid of tenants at the onset of the pandemic, negotiating rent deferrals and abatements. Obviously, rent and overall revenue were way down; by May we had processed 111 unique rent amendments within our managed portfolio. The impact those changes had on lease terms is fully displayed in April on the graph. (To date we’ve now processed 235 amendments, with some tenants completing multiple changes to their lease terms.)
In the second note, we see that cautious landlords reduced expenses on maintenance, projects and other controllable expenses, so they could realize some savings in occupancy-related costs. That prudent action—on behalf of tenants when expenses are recoverable, and to realize savings in non-recoverable cases—went into effect in April and lasted through August.
The third note stands in direct comparison to the second one: Starting in September, landlords returned to normal budget expectations for operating expenses—and in some cases they were even higher than the budget projected. I believe this reflects multiple factors: an improvement in tenant performance and rent collection; a desire to avoid creating deferred maintenance that would require more difficult or expensive mitigation as time goes on; and a general optimism that we’re moving into a new normal and have implemented successful adaptations.
The final note shows a remarkable “return to budget” in all three performance areas as of October. While this is both surprising and encouraging, it’s also important to recognize that there are some obscured realities in this combined data. Specifically, many rent deferrals extended only until September or October, and the increased revenue at that point represents additional rent and/or operating-expense reimbursements from tenants who were able to pay both full and deferred rent. The additional revenue received as deferred rent hides the loss of revenue from tenants continuing to struggle or unable to pay in full.
The key question right now: What does this data tell us about the future for commercial real estate landlords and tenants?
First, let’s look at a phenomenon that is shaping economic conditions. Across these 1,300 tenants, spread over urban and suburban locations in multiple states, there’s a unifying, compelling human story. Small business owners’ ability to remain viable in a vastly altered marketplace exemplifies their fortitude in the face of unprecedented uncertainty. Larger businesses such as our national tenants have either managed surging demand (e.g., grocery) or adapted with surprising nimbleness (e.g., pivoting to e-commerce). While Covid-19’s continuing human toll can be demoralizing, the fact that the majority of tenants in our portfolio are surviving or even thriving is encouraging, and gives hope for the future.
This extends past just our own portfolio of landlords and tenants, of course; it’s a national trend, and the anecdotes are uplifting. Our managers and brokers on the ground have heard amazing stories about tenants adapting quickly and effectively. A clothing re-seller in a tertiary market went from a focus on storefront sales to launching three new websites, extending their audience and sustaining their business. They were able to move quickly in March and pivot to a pandemic-friendly e-commerce business model, which they plan to continue even as their in-person sales return to normal. A sushi restaurant has added and opened three new locations, reflecting a highly successful shift to “touchless” takeout and delivery service. (As of this newsletter’s writing they have two more new locations in progress, representing remarkable growth due to the success of their adapted business model.)
With that in mind, I take heart in the results we’ve seen so far. Even as we enter the most challenging period of the pandemic yet—with infections and deaths surging, and state and local mandates restricting many forms of commerce—businesses that have remained viable so far are likely to continue. Despite some perspectives to the contrary, landlords have shown a desire to assist and support tenants reacting to government-mandated restrictions, and I think they’re inclined do the same again this winter.
The economic toll of the pandemic is inarguable, with far too many businesses closing, jobs lost and families impacted, but in my view the overall picture is positive. We’re seeing a resilient real estate marketplace, ably steered by conscientious landlords, resolutely sustained by dynamic tenants, and intelligently managed by well-informed firms.