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REAL ESTATE AFTER COVID-19

Gaston Reboredo • Apr 22, 2020

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Future of Real Estate after Covid-19

No question that the Corona Virus has changed our lives not only in the United States but all over the world. The “new normal'' as some people refer to our new life after this virus, because there is certainty our lives will not be the same after this crisis. All of us will experience changes in many aspects of life, travel, dining, public gatherings, the way we shop, public transportation, concert halls, sporting events and the list goes on and on. A vaccine is not expected to be available until 2021 and the Center for Disease Control expects a resurgence of the virus in the fall of 2020 so it is not over. It is not the intention and certainly beyond its scope, that this presentation discusses how this virus originated, if it was a mistake or the first steps on a planned biological war, an answer to this will further affect our lives on this planet. Hence, we only discuss what relates to our field, real estate investing.

How real estate has been affected and will continue to be affected if the crisis, even on a lesser extent, remains in place in our society. Here is my view by property sector and type in a very summarized way.

Housing: No question that in the short term the housing market will be affected. With an expected unemployment rate of about 30% to 40%, as some economists predict, in the coming months, there is no question that the universe of buyers will shrink and the rental market will expand. Inventory of homes should increase as well as foreclosures and distressed properties. The forces of demand and supply will force prices down. Mid term, if inflation remains low as well as interest rates, which everybody expects, the market should stabilize as construction of new homes has been halted and population growth continues at the expected pace. Like any market, this brings opportunities for some and problems for others. The trend to shift to multifamily living, propelled by millennials and baby boomers, is expected to continue although it is not clear how the population will look at amenities, access and resident interaction in Condominiums and Rental Communities. Single family rental investment will also be positively affected despite the short term rent collection issues that may exist.

Retail: The sector that prior to this crisis was re-inventing itself due to the growth of e-commerce and changes in customer behavior. About 5 years ago customers started to look for an overall experience and true value proposition. Retail centers that offer unique retailers and products, entertainment, great dining and/or good value for the products sold, were the ones most likely to survive and do well. Big boxes were in decline as well as department stores and less need for the square footage at the store was already needed. Conversion of big boxes to smaller stores was already taking place and it was believed that brick and mortar retail was not going to disappear but had to change the customer experience that consumers were demanding and of good value. Centers that were part of mixed use developments or that instituted big changes were doing well. In today’s environment of big data, most corporate decisions are data driven. The amount of data that one can collect from consumers these days was incomprehensible a few years ago and retailers should use this data to make the right decisions. Smaller neighborhood centers that are mostly anchored by a grocery store and/or pharmacy had good positioning although many experts expected big developments in online grocery shopping with a strong delivery service. Pharmacies started to change as health centers, offering in-store walk-in clinics, more groceries and lab services trying to re-invent themselves. Retailers knew that e-commerce was expected to grow exponentially and were trying to adapt and change their business model based on data driven decisions. Covid-19 just accelerated this process. More and more people are shopping online and the segment is growing faster than expected. Pharmacies such as Walgreens and CVS are offering 1 to 2 business day free prescription delivery. Many grocery stores are offering delivery services, some at an additional cost, something that Publix supermarkets pioneered about 10 years ago and did not work out, the cost of being too visionary or understanding the future too well before it comes. The new service of curbside pick up that Walmart, Target and many groceries are offering is a step in between but we expect home deliveries to increase in groceries, pharmacies and online shopping will also continue to increase, in short e-commerce will continue to grow at an unanticipated pace.

The mandated shelter in place rules forced businesses to close for over a month in many places, laying off or furloughing personnel. Several businesses and many restaurants will never re-open. Others will have financial problems when they need to apply rules of physical distancing in bars and dining rooms (less tables, larger separation between clients), resulting in less customers per day but with the same operating costs. Many will not survive. How this will affect vacancy, rents and shopping center traffic is still a question mark, we see an uncertain future for retailers and owners of shopping centers and malls. It has been announced that JC Penny may close its doors, Macy’s, Nordstrom and many others are restructuring debt and maybe considering bankruptcy.

Office: In the last 10 years square footage of office space per employee has been declining due to advances in technology. Working from home or shared spaces, videoconferencing, advances in communications and bandwidth of almost all internet providers (as well as fiber optics) has shown employers less need for physical office space (less operating cost) and increase in productivity (less time and money wasted in employees commuting to and from home to the office location as well as happier employees). The growth of virtual offices, shared offices, has been exponential as well. Concepts such as Regus, WeWork and many others provide a business presence and the ability for face to face meetings when needed in hundreds of locations worldwide. Most companies are no longer confined to a “downtown location” and the trend was less and less physical office and more and more shard spaces and telecommuting.

With Covid-19 forcing almost everybody to adapt to a way to work from home, showed many people they could do things they never thought were able to do, increase productivity and employers are more aware of the potential in savings. Especially when children can return to schools (we do not see a big increase in remote learning with the exception of Universities and probably now high school) the work environment at home becomes more professional and conducive for business operations. Also the shared office space around the corner is cheaper and closer to home so whoever cannot work from a work office has other flexible possibilities. Therefore we will see less and less demand for office space and the trend of smaller offices in intelligent buildings with great amenities and shared spaces, in urban and suburban markets, to continue and increase.

Industrial and Warehouses: The demand for Distribution centers has been increasing in the last 20 years. First the globalization process of the last decade has been demanding better distribution of products and more storage space and cargo consolidation facilities and operations. E-commerce has been another factor increasing the demand for industrial/distribution properties. Logistic operations are demanding better spaces with more technology. Taller buildings, more column spacing and integration of latest technologies are important factors in the current design of buildings. Based on all our discussion in this brief article we expect that this sector will experience the highest growth in rent, demand and value. Often called the most recession proof property type, now more than ever well designed and located distribution/warehouse properties will be well positioned as good investment properties. As e-commerce continues to grow, especially with the push given by this crisis, short and long term demand of this property type will increase but its design to fit the needs of fabricators and distributors will be very dynamic, now more than ever. As technology develops and the consumer demands a real time buy today and deliver tomorrow kind of service, flexibility to adapt to faster and excellent service levels is essential and buildings may be tailored to fit some operations but most need to be versatile.

Covid 19 will bring, at least in the United States, a “back to home” approach of manufacturing, at least for many essential and/or tactical products which will increase demand for industrial facilities as well.

We need to see how we recover from this crisis and how and when the local and global economies get back on track. What is concerning is the national debt level and recent spending.

Gaston Reboredo CCIM CPM GRI

Broker

Florida Property Management Services LLC

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Renting a Property before Current Tenant Vacates

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No question that one of the secrets for success in rental investment real estate is to minimize vacancies and turn overs. The longer a tenant stays in a property the better return on the investment. Ideally a tenant will rent a property once and stays there forever, renewing the lease agreement year over year. We all know this would be the goal in a perfect world but we also know is not reality and tenants will someday move out because of job relocations, purchasing a home or many other changes in life. When a tenant gives notice to move out at the end of the lease, most landlords want to put the property on the market right away to avoid or minimize vacant days in between tenants. Especially when the existing tenant is a good tenant that has taken care of the property and behaves professionally. Although this would be ideal that the existing tenants moves out on the last day of the month and the new tenant moves in a couple of days later, we are going to discuss why this is not a good practice and it may work against our investment goals. Here are some issues with trying to market and lease a property while occupied: If the landlord or agent is going to show the property entering the premises with tenant's permission and prior notice, a potential liability is created. You are showing the property basically to strangers that walk around the unit while tenant's personal belongings may be exposed or at an easy reach. What happens if the current tenant calls you later for example, stating that her new expensive gold watch and some jewelry , that was kept inside a drawer in her bedroom, disappeared. Or that the cell phone that he left charging in the kitchen is no longer there after your showed the property yesterday afternoon. Over the years we have heard, and thank God it has never happened to our company, that incidents like this have occurred. Our President, Gaston Reboredo, remembers that back in the early nineties the Realtor Association of Coral Gables (at the time) issued a warning to Realtors that there were two professional thieves posting as a couple wanting to lease expensive homes in the area and while one distracted the agent the other one went through drawers looking and stealing jewelry. So many things can happen and this liability is present when showing occupied units. maybe not the most important issue of the ones we are discussing today but one that must be taken into consideration. If on the contrary the current tenant is present at all showings, then it becomes a logistic problem. How do you show the property during business hours? Most likely your existing lease agreement gives you the ability to show the premises with sufficient notice to the tenant but you cannot force the current tenant to leave work to go to the unit for a showing. Then during the evenings and weekends how many times you bother the tenant? and how many times the tenant is not available at the precise time the prospective tenant wants to see the unit. The existing tenant may be running errands at the requested time of showing and the alternative time offered by the current tenant may not be good for the prospective tenant so the whole matter becomes a logistic nightmare. Let's say the current tenant is always available to show the unit, which is not reality, then another problem arises. Even the best tenant the most organized and clean person in the world when it comes time to moving a process of packing starts, putting things into boxes, stuff and boxes all over the house preparing for move out date. It is not easy to show a property while the current tenant is in the process of preparing to move out and it is very difficult for the property to be properly presented to the prospective tenant and for this prospective tenant to really see the unit and see it as his or her new home. Besides the issues discussed, even if we can deal with the liability stated in item 1 above and we have permission to access the unit at any time, we face another problem. Again even the best tenants that are Mr or Mrs Clean, have to run to work or school in the morning and if we are talking about families now they need to get the kids ready as well, not having enough time to have the premises in the best possible condition for a showing. It is not rare that you arrive to show a property to a prospective tenant and the pots and pans are dirty in the kitchen sink, the smell of a recently cooked meal is all over the place, towels on the bathroom floor and beds not made, not to mention the underwear that was unintentionally left somewhere. And if we are talking about evening showings in the middle of family dinner, kids doing homework or tenants watching TV, who by the way did not have enough time to prepare the home when they got back from work, we are looking at not ideal situations to present a property. Difficult to attract good new residents if the property cannot be showcased professionally and in the proper way. Also if your properties are not properly presented you will not only be wasting time in trying to rent them but your reputation as a landlord in the Realtor and Leasing community will be affected. Then we need to discuss other potential problems that may end up in legal liability to the landlord. Let's discuss a scenario where the current tenant was very cooperative, present at all showings and the home was pristine at every showing. Let's say the current tenant is leaving at the end of the month because of a job relocation out of the City, or another location in the same City, needing to rent a closer unit to the new employment location or because of the purchase of a home for the first time, achieving the dream of homeownership. Then you sign the lease with the new tenant to start the new tenancy during the first few days of the following month after current tenant vacates. What if the new place current tenant is moving to is not ready or the Home Owners Association required approval has not been issued and the move in date has to be delayed and current tenant cannot leave the premises before the start of the new lease with the new resident? what if the closing on the first home is delayed due to the numerous reasons real estate closings are delayed? In both cases current tenant will remain in the premises and yes you may be able to charge double rent by law or by lease agreement but the only way to force the current tenant to vacate is through an eviction process which may take in South Florida 30 to 45 days or more, depending in the area and if it is contested or not by the tenant. Meanwhile you have a contractual agreement with the new tenant to deliver the premises at certain date which now is going to be impossible but the new tenant already gave notice to vacate to that other landlord and is obliged to deliver the premises at the expiration of that rental agreement or face the same liability of double rent, eviction, etc. And it does not stop here, the new tenant may have arranged and paid deposits to move in companies, scheduled utility turn on services, requested mail forwarding, etc. You can see liability, legal costs and problems all over a situation like this, that happens very frequently. These are sonly ome of the problems all landlords face when trying to rent a property while tenant occupied, thinking they will be able to eliminate or significantly reduce the vacant time. In summary, best practices call for avoiding to show properties while rented to existing tenants. Plan properly, have your maintenance team ready to come in as soon as the existing tenant moves out and turn, in a couple of days or so, the property into rent ready condition so you can start marketing it to lease showcasing it in a clean, professional way, to attract good new residents in the shortest possible period of time . A property that is properly exposed to the rental market will rent faster, for more money and to better tenants with the least amount of problems to all parties. At the end you want a good new resident that pays rent on time, takes good care of the property and renews the rental agreement for as lomg as possible reducing the vacancy to the minimum on a long term basis.