Some landlords say only 25% of retail tenants paid April rent | Hacker News Reader

Some landlords say only 25% of retail tenants paid April rent

wsj.com

82 pointsfortran7756 comments

Here's the actual part of relevance: "Some enclosed mall and shopping center landlords say only 25%-30% of their retail tenants have paid their April rents thus far, according to three owners with properties around the country. "

This is a small sample and specific to a single sector of retail. That said, I think this trend will likely hit retail more widely this month since so many small businesses and franchisees are struggling right now.

Do you or does anyone know a good index or industry standard to look for and follow on CRE defaults/data come May?

You might be able to find some packaged funds that become more or less valuable depending on the yield of the debt held by those entities, which would correspond to the market's best estimate of their default risk.

You might want to look at commercial mortgage-backed securities. The credit default swaps on them could be a way to gauge their likelihood of default.

It'd be painful but it might make sense for mall owners to forgive the rent while everything is closed. If their tenant goes out of business, they're not getting the back rent and now they'll have a vacancy in a time they're unlikely to find another tenant quickly. Waiving back rent might enable some of their tenants to stay in business, paying rent going forward.

In the case of enclosed shopping malls, if the entire facility has shutdown, it seems unethical to charge rent to stores that no one could physically access. This situation is probably covered in the lease in boilerplate language somewhere.

OTOH, insurers might not pay if rents are voluntarily forgiven. Then again, a pandemic quite likely falls outside the remit of many policies anyway.

>>It'd be painful but it might make sense for mall owners to forgive the rent while everything is closed

You are assuming that the owner himself does not have a mortgage with a bank. A bank would never just waive mortgage payments. The preferable thing to do is to make a payment agreement for the late rent payments. With the first payment for the late rent not due until conditions improve.

Although, this is what the 2 trillion stimulus package is supposed to address. I think.

Well, good luck to the bank. Foreclose and enjoy owning a few acres of urban blight.

Banks are highly specialized, and that specialization isn't well suited to property management. Property management is highly specialized and that specialization isn't well suited to running a retail operation. Retail operations are highly specialized and blah blah blah.

So, you gotta pick. Either put things on pause, and hope it comes back, or let those with specialized skills wander off and do what they do in other places. I'm pretty sure there will be plenty of demand all over the country once there's a vaccine. 2 years?

Funny how organizations have an appetite for risk until they start losing. Too much avocado toast I guess.

This is glib, but, I think, has a kernel of truth. Economies work due to markets. The market is coming back either way. Hang on to the mall in the hope it'll bounce back, or unload it now.

> Well, good luck to the bank. Foreclose and enjoy owning a few acres of urban blight.

Theoretically Id' agree with you, but that's exactly what happened in 2008. Banks got bailed out (bigger banks got more $$) and they just rode out the recession by getting SEC to pass a rule that removed "mark to market" rules.

There is no law or regulation that is exempt from being manipulated by the most powerful lobby in the country.

_blink_ Err. No. I'm not advocating for a bank bail out. The joke about avocado toast pointed in that direction, but was a bit opaque.

I think there's basically a pyramid. at the tippy top, there are fabulously profitable large organizations. Those are built on smaller organizations, recursively down to people.

I've got no problems giving a 20 year old who thought a magna shop was their way to riches a bailout. they're young and dumb, will learn and do better next time. The bigger you are, the more responsible you need to be. Banks should be elite. they evaluated the alternatives and made the best bet they could.

Essentially at the lowest level, be super tolerant. the higher up an organization gets, the more responsibility they take on. if that's too scary, don't grow. if you need the net, keep the net. if you don't, well, best of luck.

I know it doesn't work this way. I think it should, but I can't wave a magic wand and make the world work like I want it to.

I think if everybody has enough money to buy food and possibly pay rent, all the other layers "above" will sort themselves out by clever people. The bottom drives the market. The top is like a whale eating krill. Everybody wants to be the whale. but if there's no krill, there's not much of anything.

There are lots of parts of the economy that are still working. Why break them? Why not help only those who actually need it?

Err, I made a more elaborate reply to r00fus below.

Essentially, give people money if they're on the edge. Corporations are the cogs, and relatively easily replaced. Some people suck, some people are amazing, but it's fundamentally people that drive, not corporations.

It doesn't actually work this way. it'll never actually work this way. in my, very humble, opinion it'd be better for everybody.

It’s still too presumptive to assume that there’s going to be a vaccine, or that the virus won’t mutate too quickly.

I'm going to sound like "it's just the flu" guy, and I hate that. I hate it so much.

Humans are terrifying apex predators. We're not great at flu vaccinations. But we're good enough to continue to be apex predators.

I'm not a doctor, I'm absolutely not your doctor. mutation isn't free. It's tough to maintain infection rate when we're hunting. Mutate, to hide, for sure. The virus wins in a few ways, but we'll find that and turn it into a cold.

The virus will get lots of chances to kill us all off. Actually, I have some risk factors and my chances aren't great. I'm an example human, but not the paragon human.

Anyway, perhaps wishful thinking. Mutation rates are scary, but disrupting a couple of factors is probably enough. If it's infectious but non-fatal, who cares? If it's fatal but can't transmit, who cares? Mutate. go nuts. just get away from this local optimum that is infectious and fatal.

Some stores sales are just deferred, but many of them are never getting those sales back. The owners would be nuts to agree to make late rent payments -- if they weren't open, they don't earn. By the time we're finally no longer quarantined in the bay area, we aren't going to go out and eat 3 months of restaurant meals in arrears.

We're now deciding who pays for the economic shortfall, and stores should play hardball. Do landlords want to be renting space in the coming retail apocalypse?

The landlords don't need to care about the retail apocalypse. They can just rent out to whatever retail competitor decided to actually take advantage of the real solution.

Are there tax implications for rent forgiveness vs lease defaults?

If the landlord does accrual accounting then the landlord has a deductible loss, fills out a 1099-C, and the tenant needs to record that forgiven rent as income.

OK, I thought something like that. But doing that for rent forgiveness seems iffy, in that it'd be the landlord's choice, and not something that the tenant does.

It's income. He would have had to pay it if it weren't forgiven. It's a contractually obligated debt.

> If their tenant goes out of business, they're not getting the back rent and now they'll have a vacancy in a time they're unlikely to find another tenant quickly.

In some cases (I have first hand experience - perhaps it is limited to small businesses), the business owner has to agree to be personally liable (with his/her own personal assets) if the business fails to pay the rent. The business may go bankrupt, but the landlord can still go after the owner's personal assets.

That's one way for the landlord to lower his/her risk exposure.

Many commercial leases require the lessee to take out a line of credit sufficient for a few months rent too - no doubt landlords will be calling for those LoCs to taken out.

This is my experience as well. My wife and I have a franchise location of a well established multi-national business...If we personally fail they would swoop in and run the location.

But the landlord still had us personally guarantee...There were several empty locations in the plaza so it's not like we were competing w/ others for space. We had some leverage.

Commercial landlords will get their money back, and have the lawyers to do so.

Not always possible with property taxes (no government I know of is allowing these to be deferred. I'm a commercial landlord who collected no rent for April--I explicitly told tenants they didn't have to pay), mortgage, utilities, etc.

> now they'll have a vacancy in a time they're unlikely to find another tenant quickly

Also worth remembering, even if they find another business to move in, it will typically include a few months rent-free as well as modification of the space. Not only will that get delayed, any modifications will require contractors with months of queued up work.

If you owe the bank a million dollars, you have a problem.

If a million people owe the bank a million dollars, the bank has a problem.

Particularly with fractional reserve banking.

In terms of commercial renting in the "better" states, this is why the government requires reserves, lending only at a percentage of their income, and take consider economic downturn in underwriting decisions.

I say this in regards to commercial lending though. Residential is no holds barred, anything goes cause banks and mortgage companies house people without any consideration if it's reasonable.

The biggest problem with financial bubbles is that people get super-risk averse. As soon as there is talk of over-indebtedness, everyone throws the book at them. Then the bubble pops.

Agree with you, however bank rules rely that normality law (small loss at the tail will be covered by the entire population). Here we have a typically extreme case event and generalized Pareto law is more illustrative to deacribe what we witness right now. Banks reserve are clearly not enough to cover all the all loss. So unless a global agreement with every parties ( renters, landlords and Banks) can't see a fair solution popping up.

One step down stream was Simon properties buying forever 21 because the latter occupied so much space in their malls in a way that would be difficult to replace (also apparently there are some clauses in the leases near F21 locations that would be triggered if F21 leaves)

Here's the linked spot in that landing page:

https://www.wsj.com/livecoverage/coronavirus-2020-04-06/card...

Not much detail beyond the headline though..

The smaller strip malls in my area might be 25% "essential" services like restaurants. The rest are shutdown by order of the government as "non-essential" - places like barbers, hair and nail salons, yoga, gyms, cell and electronics, shoes, spas, luggage, on and on, and replicated over and over again. These small businesses aren't paying any rent, they have no meaningful reserves.

30.2 million small businesses in the U.S. And the Payroll Protection Program is $350 billion, is $11,666 on average. For two months. For rent and payroll. It's not enough by a long shot.

What are the implication of people not paying rent for a number of months? I can’t fathom what this does to the economy.

Depends on if they are likely to pay the back rent in the future. A few months' delay is a cashflow hiccup. Widespread default, extensive non-payment of back rent, will see property values drop.

A far bigger hit imho is what happens when people stop making mortgage payments.

Something tells me there's a significant chunk of the total CRE market in terms of sq ft and rental income that is not coming back even if everything reverts to normal in a month.

Plenty of companies were already overextended financially, or outright unnecessary in the first place. Some the owners burnt out, ready to retire, etc. that have been forced early.

In other words, that market has since peaked - does anyone think otherwise?

I remember reading an article in the economist a couple of years ago that said the US has vastly more retail space than it needs. Something like eight times as much per capita compared to the UK.

I could believe it...of course that probably means 8x inflated CRE agents/brokers too.

Nothing a few bank bailouts won't fix.

It's a good question. Certainly many of these landlords have mortgages that need to be paid on their properties and the usual maintenance and upkeep of said properties. If landlords cant pay their mortgages, I'd assume the properties would be foreclosed by the banks - they'd likely give tenants a notice of some period of time before they'd be required to vacate. I don't know all the ramifications but my guess is that property valuations are going to go down fairly steeply as well. I've seen some efforts to hold rent strikes and I think those efforts will have more negative than positive results. I'm sympathetic to those that don't have enough to pay the rent because of job loss and economic shutdown but there are certainly those out there that will take advantage of the situation as an opportunity to try to shirk payments.

I wonder if policy could be useful here: temporary rent and mortgage freezes perhaps?

"my guess is that property valuations are going to go down fairly steeply as well." Yes and how much depends on how much the gov props them up?

That plus possibly the banks' actions: the availability of things like mortgage deferrals and extensions.

Another thing to consider, which is a big unknown at this point, is what immigration policy will look like after the dust starts to settle. If it becomes more stringent than it was, that means less demand for housing in the future, and the valuations of property would likely reflect that.

Not disagreeing at all, but note that the article is about commercial property, not housing.

> I wonder if policy could be useful here: temporary rent and mortgage freezes perhaps?

That's the big question. Can't everyone just be cool with deferring payment on rents and mortgages? Ultimately this all bubbles up to banks and investment products, right?

I wish it were possible to just declare this "the lost Spring of 2020" and allow the market to take a hit and then recover steadily without entire cities beset with many months of boarded-up storefronts and foreclosed properties.

Why not just give those who need the money a loan? Deferring rent payments and mortgages is basically a non formal loan but it is shifting all the risk into the banks. Let's say you are a bank and you defer 4 months of mortgage payments and then the landlord defaults. Those 4 lost months are now the liability of the bank. This is basically a non formal form of economic stimulus. So what you have done is take a problem that was caused by the government (the economic loss from quarantine dwarfs the economic loss of everyone having the corona virus [0]) and shift all responsibility away from it into a fragile system that is known to break frequently. The idea behind this bullshit is to say "no bailouts" but the reality is that once the banking system is collapsing there will be far severe bailouts than before and all the work you have to prevent them was a complete waste and completely distorted the economy.

Events like 2008 were entirely about markets destroying themselves but now the situation has reversed and it's the government that is trying to deliberately destroy the economy and then people shout louder and want even more destruction.

For what it’s worth, interest rates are very, very low, so commercial mortgage rates should be fairly low.

If tenants don’t pay, the landlords are just as screwed. And if commercial real estate values crash, the lenders may have problems.

Anecdotally, I've heard a lot of people point to the CRE bubble right up there with PE and student debt.

I would imagine that cumulatively in the US there will be hundreds of billions in defaults before this all blows over, which could easily be 12 months before even bottoming out.

Edit: yeah I'm going to bump that to a couple tril in defaults if the aggregate market is actually 15-17T (as of late 2018 per https://www.reit.com/data-research/research/nareit-research/...

My wife owns a small business with a retail location. I had to personally guarantee the lease.

Don't worry, landlords will get their money one way or another.

Kind of weird title to quantify as “some”

Agreed...by the time I found the blurb in reference, I was underwhelmed by how generic the limited supporting data points were. That whole page is like WSJ light and reeks of marketing over substance.

yeah, I wondered if it should say "Some landlords say only 25% of their retail tenants paid April rent"

> Some landlords say only 25%

Huh?? Might as well say,

> While some other landlords say 49% paid rent (which would be true for "some others"

> And some other landlords say 83% paid rent (which would also be true)

> Yet some other landlords say 0% paid rent (which would also be true)

After that "some" in the title, you can replace 25% with whatever number (<100).

Is this supposed to link to some specific article? The link takes me to a general coronavirus landing page.

It looks like it was a specific post on the page.

The direct link is https://www.wsj.com/livecoverage/coronavirus-2020-04-06/card...

It'd be nice to update the HN link to the direct link.

Email the mods using the footer Contact link and they’ll do that for you.

http://archive.is/PjdCU

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