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What’s Happening With Off-Campus Student Housing During the Pandemic?

What’s Happening With Off-Campus Student Housing During the Pandemic? on morrissegroup.com

A once-lucrative market is in the throes of COVID-19 confusion

Once upon a time—2019, to be exact—real estate experts were touting the stability and strength of the off-campus housing market. Long overlooked, the student housing sector was enjoying tremendous growth—reaching an investment volume of $11 billion, a number which had “more than tripled since 2014.”

The great appeal of entering this sector comes down to two key items. First, the variety of properties, from single condos and duplexes to multi-family properties, means there is something for every investor level. Second, off-campus housing has a history of stability. University enrollment tends to remain consistent in times of market volatility and during economic downturns.

As long as there are students, there is always a need for housing.

When the economic hiccup is pandemic

Experts could never have predicted college life in 2020 and the drastic change in education during the COVID-19 pandemic, however. As large and small group gatherings were discouraged and/or forbidden, as businesses shut their doors, and as cities quarantined, universities and colleges followed suit. Classes were canceled. Dorms evacuated. Students returned home to live with their families and resume coursework in an online world.

Many students in off-campus housing faced a particularly tough challenge. Without access to university services and with the loss of both off- and on-campus jobs, many of them returned home. Others worked out plans to quarantine with a friend. Either way, apartments—with leases ending at the end of the spring term or in August—became nothing more than storage units away from home.

Financial consequences and an uncertain fall semester

The result has been a significant financial challenge for both students and landlords. Many owners and property managers worked with renters to waive late fees and pointed them toward assistance resources. However, many students still have to pay rent on what is essentially a vacant property. And at the moment, the fall 2020 semester will most likely not provide answers that will satisfy all parties.

By April, many students were already making housing arrangements. Leases set to begin in September 2020 have already been signed and deposits made—but as the summer months progress, there remains a giant question mark about what else COVID-19 will deliver, especially as states and cities begin the delicate task of re-opening.

The re-opening process, as of this writing, is still new. With anti-mask and anti-social distancing protests growing, it has yet to be seen if these movements or the phased re-openings will result in a second wave of infections before the start of the fall term.

Universities, reeling financially from the on-campus housing refunds of the spring semester, will have to weigh re-opening with remote instruction. Efforts to start classes will require a redesign of the college experience. Some of these changes and issues will likely include:

  • Limiting enrollment in courses and lecture-hall seminars.

  • Implementing single-occupancy dorm life.

  • Canceling overseas study programs.

  • Grappling with a loss of international students reluctant to attend college in a nation with more COVID-19 cases and deaths than any other country.

For owners of off-campus housing, this uncertainty can roll either way. If colleges remain closed and resume online courses, the need for off-campus housing will again be at a minimum. Broken leases, cancellations, and sublets are sure to follow. But if classes resume, the combination of single-dorm occupancy and U.S. students now unable to study abroad may help spur demand for off-campus living arrangements.

The prospects for investors interested in the off-campus housing market

While no one really knows which way the COVID-19 wind will blow, each university is making its own decisions on approaching the fall 2020 semester. As long as there are students, there will be some need for off-campus housing—either for this term or in academic years to come. And there are a few key issues for investors to keep in mind:

  • Many students are first-time renters, which means they may not have the references and credit histories often required before leasing. Similarly, college students may not have a basic understanding of proper rental management, and they have a reputation for placing a lot of wear and tear on a property. In other words, this can add up to a more challenging property management experience.

  • It’s not uncommon for parents to co-sign leases, and the impact of this can have benefits and drawbacks. Some parents may be absent while others micromanage, and many offer the financial stability that ensures compliance with the terms of the lease. No matter the case, a landlord can expect to be dealing with multiple parties for a single unit.

  • COVID-19 has highlighted the need for greater maintenance of common areas, such as pools, fitness centers, lobbies, and mailboxes.

  • This is an opportunity for landlords to review leases. Under the present health crisis, it may be wise to consider a no-party clause (or to limit the number of guests) in light of social distancing guidelines and to protect the lessee and other tenants, as well as the overall condition of the property.

Morris Southeast Group is in this with you

Like many of you, Morris Southeast Group is looking forward to the day when COVID-19 will be history. Until that happens, we must adapt to conduct business in this new normal. And our team is here for you. To learn more about what Morris Southeast Group can do for you now and in the future, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Negative Yields, a Recession, and CRE Investing

Negative Yields, a Recession, and CRE Investing on morrissegroup.com

Outlooks in the time of the inverted yield curve

For a few years now, there have been whispers of an impending recession. For all of that talk, though, it has always seemed to be coming but never quite happening. With the arrival of coronavirus onto the world stage, a recession (and potentially worse) is inevitable. Economists are closely looking at global indicators, and investors and non-investors alike are in an economically fearful state of mind.

One factor used to gain a better picture of both the global and domestic economies is bond market performance. And now is a good time to review what the experts have been seeing.

Bond market vs. stock market

While stock market performance gets all of the headlines, it’s the bond market—quietly performing in the background—that economists also study to gauge the economy. Although bonds and stocks tend to compete with one another for investment dollars, bonds traditionally do not have the levels of volatility and speculation associated with stocks.

As a result, bonds—a tool for the government or corporations to sell off debt—are often considered a better gauge of understanding the mindset of many investors. The bond market can sometimes provide a good picture of the economy 6 to 12 months from now.

Taking a closer look at yield curves before the crisis grew

One of the first indicators experts consider is the yield curve in the bond market. Generally speaking, the curve is based on the yields of various bonds with various term structures and maturity terms. The most commonly watched yield curve is between the two-year and 10-year bonds. Traditionally, short-term bonds have lower yields than long-term bonds because investors require more compensation for having their money tied up for a long period.

Yield rates are determined by the Federal Reserve, investor demand, and the banking industry. A change in rates changes the curve. Essentially, there are four types of curves:

  • Normal: This model has low yields for short-term bonds that increase and ultimately level off for bonds with a longer maturity. A normal curve is indicative of a stable economy.

  • Steep: Although similar to a normal curve, the steep model has higher yield rates along the curve with longer-term bond yields soaring upward. This indicates a growing economy.

  • Flat: As the name says, this curve is barely a curve at all. It’s basically a flat line and indicates uncertain economic times.

  • Inverted: The inverted model is the complete opposite of the normal yield curve. Here, short-term bonds have higher yields than long-term bonds, resulting in a downward-sloping curve. This is usually a warning that investors do not want their money tied up for extended periods for fear of an impending recession.

CRE in the time of an inverted curve cycle

While most economists agree that inverted curves are rare, the world economy had been drifting in and out of an inverted cycle for months before the current crisis, especially in European and Asian markets. The pre-coronavirus strength of the US economy in other sectors—such as consumer confidence, job growth, low interest rates, and yields slightly above those in other countries—seemed to be compensating for the inverted curve and holding off a recession.

This outlook started to change in February of this year when coronavirus fears swept around the globe. By March, in an effort to provide support for the economy, the Federal Reserve, in a coordinated effort with the Bank of England and the Bank of Japan, slashed its key interest rate to just above zero. Stocks tumbled, and the yield curve for 10-year bonds fell below that of two-year bonds. Simply stated, the steeper the inverted yield curve, the louder the recession alarm.

CRE and the implications of coronavirus

In a “normal” situation, some experts believe an inverted curve cycle can be good for CRE. To protect the yields gained in short-term bonds, investors turn toward the strength of commercial real estate. Similarly, investors looking for the higher yields once promised in long-term bonds also look to CRE, specifically in the industrial and multi-family sectors.

These days, as you are well aware, are far from ordinary. While lower interest rates are designed to encourage borrowing, this recent cut happened at a time when businesses have been forced to shut their doors, and workers are quarantined to their homes. Additionally, this is entirely new territory, and there is really no way to predict how long the impact of coronavirus will last—nor how deeply it will cut.

Supply lines, like those needed for remodels and new construction, may be disrupted. At the same time, some economists believe the Fed acted too swiftly, limiting a key policy tool usually reserved for counterbalancing an actual recession.

Even the best predictions are fluid

Experts are presently looking at three recovery scenarios: V-shaped, U-shaped, and W-shaped. In the first case (V), there is a rapid return to normalcy, with eased travel restrictions, the discovery of a vaccine, and growing confidence to re-open schools and businesses. On the other hand, a U-shaped recovery is slower, with coronavirus holding the steering wheel for the global economy. And W-shaped is a worse scenario, with a recovery hit hard again by further outbreaks and negative economic impacts.

As virus data is collected and analyzed—and indicators show the economy potentially moving into one of these scenarios—banks will respond accordingly.

The only accurate predictions that can be made, right now, is that the emphasis will remain on the essential health and welfare of billions of people—and that COVID-19 will continue to take a drastic toll on the global economy.

As always, Morris Southeast Group is committed to meeting your CRE needs. More importantly, we want all of you to stay healthy, heed medical advice, and take necessary precautions for you, your families, and your businesses.

To learn more about what Morris Southeast Group can do for you, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Managing 2020’s Election Year Jitters

Managing 2020’s Election Year Jitters on morrissegroup.com

No matter who wins, COVID-19 will be in the Oval Office

Since its earliest days, the cornerstone of Donald Trump’s presidency and his administration’s argument for re-election has been the strength of the economy. Talk of an inverted yield curve and a potential recession was often negated by the power of other economic indicators, such as low unemployment numbers. This strength was not only great on the home front but it also economically emboldened the U.S. internationally, especially when compared with European nations.

This fact wasn’t lost on many of the CRE industry’s top players. In two Q1 reports from early 2020 (the National Investor Sentiment Report and the Real Estate Roundtable’s 2020 Q1 Economic Sentiment Index), executives, lenders, investors, and brokers remained optimistic for 2020.

Even with a Presidential election on the horizon, both reports indicated a pre-election surge in investments to make money work, followed by a wait-and-see approach for the post-election cycle. It was all nothing out of the ordinary, given the data available.

COVID-19, 2020, and the election

Then, COVID-19 arrived and turned these predictions and expectations upside down. While it’s a maxim that investors are afraid of the unknown—a big reason for the wait-and-see approach—the virus has single-handedly presented this country, its economy, and its politics a big, heaping bowl of unknown and instability. The longer it lingers, the more likely it is that COVID-19 will be a presence during and after the campaign. And, no matter who wins, the virus is sure to be front-and-center in the Oval Office.

For the United States, the numbers, as of this writing, are not good. The country leads the world in cases (more than a million) and deaths (topping American casualties suffered in the Vietnam War). At the same time, economic stimulus packages expanded the national debt to new heights, tens of millions of Americans filed for unemployment benefits, and countless small businesses were left in loopholes as funds in the Paycheck Protection Program were swallowed up by large corporations.

As the stock market lost the gains made in recent years, debates raged about how and when states should re-open for business while combatting fears of lack of virus data and predictions of a second wave of infection.

Overseeing all of this is a White House that has swung from mentions of “total authority” to “no responsibility.” According to a recent NBC News/Commonwealth Fund poll, 53% of respondents had little or no trust in Trump providing information about the pandemic—though a significant minority of respondents do (at least, “somewhat”). COVID-19, it seems, is running the show on its own terms.

Recession is the only certainty

About the only thing that is certain in these uncertain times is that the long-predicted recession is rapidly approaching and will most likely remain for some time. A “normal” recession is often described as an economic correction—two consecutive quarters of economic contraction that follow a period of growth. As companies face financial struggles, lay-offs follow, and new jobs are not created. This then trickles over to consumers who choose to save money and spend less.

The COVID-19 recession, though, is different—primarily because it occurred suddenly and rapidly on a global scale. Despite efforts by the Fed to lower interest rates, the enormity of the crisis was apparent by the end of Q1. Q2 is already stacking up to be another economic train wreck—and that would signal the official start of the COVID-19 recession.

Predicting the path of the recession is anyone’s guess since this is unlike anything most Americans have ever witnessed. Managing the downturn will depend significantly on managing the quarantine. A strong effort in the latter aspect can mean a quicker end to the first; any missteps, though, could mean a more prolonged recession (or worse).

Election 2020

The 2020 race may be the year when many of us say, “Once upon a time, our only concerns about a Presidential election were cultural and social issues, foreign policy, tax codes, trade policies, and cap rates.” COVID-19 has forced Americans to look at the race through personal and national health lenses, rather than strictly a political one. Expect all candidates to present plans to not only manage the virus but also to rebuild the economy and attempt to address the personal situations of constituents.

As of yet, it’s too early to tell what those plans will be—or even how a recovery will look. Some models indicate a V-shaped recovery, while others look like a U, W, and an L. These last three all involve serious economic scars and a lingering malaise. No matter the model, though, the key for investors is always to be proactive, prepared, and agile. At Morris Southeast Group, we are holding firm to the belief that we will emerge from this crisis stronger, and that we must rely on each other to achieve this goal. To that end, we are here for you. To learn more about what Morris Southeast Group can do for you, now and in the months leading up to the election, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

How Low Can Interest Rates Go?

How Low Can Interest Rates Go?

Super-low, zero, negative … and COVID-19

When we talk about life, there is a very good chance that there will be a bright line differentiating how things were and how things are: pre-COVID-19 and post-COVID-19. That line represents the moment when our everyday actions—from grocery shopping to socializing to leasing office space—changed.

The same may hold true for the Federal Reserve. Formulas and data that worked a year ago, or even during the Great Recession, haven’t had a chance to take hold because the economy remains in the grip of COVID-19. While government officials and scientists debate the timeline for re-opening the economy, millions of Americans and investors are waiting and wondering about what happens next—and short- and long-term answers still seem up in the air.

What a difference a few months can make

It wasn’t all that long ago—December 2019, to be exact—when the Federal Reserve, bolstered by a low unemployment rate, an expanding economy, and a healthy and appropriate inflation rate, said that interest rates would remain steady throughout 2020. Then, COVID-19 happened.

On January 21, 2020, the CDC confirmed the first case of COVID-19 on U.S. soil. By March 3, the Fed announced its first action, slashing interest rates to help protect an economy already slowing down as a result of the spreading crisis—a dramatic increase in new diagnoses, a growing death toll, and rampant unemployment as preventative lockdown and quarantine measures escalated.

Twelve days later, with an economy slowing to a snail’s pace, the Fed announced an additional cut, bringing interest rates to near-zero—edging the Fed closer to exhausting its ammunition to stimulate the economy during a recession.

Are super-low interest rates a good thing?

Before COVID-19, many economists debated the Fed’s use of super-low interest rates to keep the economic expansion on track in 2019. Essentially, by making money more affordable to borrow, it acts as an incentive for people to get money out of bank accounts and into the economy.

Nevertheless, critics worried that the low interest rates could create a false sense of investment security by encouraging borrowers to take dangerous risks, creating asset bubbles that could eventually burst, and supporting zombie companies that are actually slowing growth. In other words, some argue that the Feds’ best preventative-efforts may have merely been delaying an inevitable recession.

While the Fed’s response to COVID-19 is also meant to ease the economic pain, it’s largely unable to achieve the result—getting money out of savings accounts and into the economy—because, at the moment, there isn’t much of an economy. As a result, consumers are holding onto their cash for as long as possible as they look at mounting debt and a questionable timeline on when the country may re-open for business.

In all likelihood, it will be a rolling timeline as regions experience different peak times and transmission rates. All phased re-openings will depend on the course of COVID-19, not just the decisions of policymakers.

What happens with zero or negative interest rates?

When the Fed announced its steady interest rate course in December 2019, central banks in Europe and Japan were already trying zero and even negative interest rates. At the time, that meant investors were looking at the United States as a strong option for their own money. COVID-19, however, changed the investment game, leaving many to wonder if the U.S. will follow its global counterparts. While the Fed has given no indication it will take that path yet, it’s not a bad idea to understand how it would look.

Generally speaking, we all know the banking equation. The higher the interest rate, the more you pay to borrow money—from home loans to business loans to car loans. At the same time, that rate also determines how much money consumers earn on savings accounts.

If—if—the Fed should initiate a zero or negative interest rate course, banks would see their profit margins pinched. While they would undoubtedly respond with higher fees, many analysts project that savers and those on fixed incomes would have an increasingly difficult time making ends meet because they won’t be able to get a return on their money. The lower the interest rate dips below zero, the more far-reaching the implications on bond and Treasury yields and the stock market, as well as potential runs on banks and mutual funds.

The bottom line for investors

Since COVID-19 arrived in the US, Morris Southeast Group has stressed three key points. The first is that we are all in this together. It may seem like a cliché by now, but it’s true. Many of our fortunes—economic and health-related—rise and fall together. And where commercial real estate is concerned, tenants and owners must work together to weather the crisis.

The second is that the pandemic is a very fluid situation. In many ways, it’s forcing responses and procedures to strike a balance between sensible policies and humanitarian needs. No one knows exactly what steps the Fed will take next, but it’s clear that it is doing everything in its power to prevent the U.S. from entering negative interest rate territory.

This brings us to our third key point, and that is to be proactive. To that end, investors should create a contingency plan for their investments and money should the U.S. economy enter into zero to negative interest rates—and carefully pay attention to market and economic policies. To learn more about what Morris Southeast Group can do for you now and in the future, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

COVID-19’s War On Main Street: The Status of Small Businesses

COVID-19’s War On Main Street: The Status of Small Businesses on morrissegroup.com

The fight to keep small businesses alive

By now, we are all too familiar with the artists’ illustrations of the virus that causes COVID-19. A sphere with spikes, scientists say this family of viruses resemble a sun, and so they call them “coronaviruses.” A more appropriate description of this round, spiky appearance may be a naval mine. Because right now, this country—in all of its regions and sectors—is at war.

One segment being crushed by COVID-19 is small businesses, places that line the nation’s Main Streets and strip malls. It’s these local stores that help define a community. For their owners, they are the dependent children into which they’ve sunk their savings and financial futures. Right now, those children are very ill. And each business’s failure could mean financial ruin for the owners, their families, and their employees, in addition to impacting the communities they call home.

COVID-19’s impact on small businesses

To get a better idea of COVID-19’s effect on small businesses, Main Street America (MSA), an organization dedicated to revitalizing commercial districts, conducted an online survey of 5,850 small business owners from March 25 to April 6. Of these organizations, 91% have less than 20 employees. As in all things related to COVID-19, the numbers are staggering.

  • As a result of quarantining and supply chain interruptions, it’s estimated that 3.5 million small businesses are at risk of permanently closing in the next two months. If the crisis lingers, that number swells to 7.5 million.

  • At the time of the survey, 35.7 million small business employees were potentially facing unemployment. The most recent number, as of this writing, is that a staggering 22 million people have filed unemployment claims.

  • Not surprisingly, small business owners overwhelmingly said their primary need was financial assistance and penalty-free extensions on bills.

The government’s response

There was great fanfare when both houses of Congress and President Trump reached an agreement and signed off on the $2 trillion economic stimulus package. As part of the efforts to help smaller entities, the Small Business Administration (SBA) was put in the lead. But shortly after the stimulus’s rollout, the SBA was swamped with claims and had to adapt.

The hallmark of the act, and one that directly served small businesses, was the Paycheck Protection Program (PPP), a $350 billion fund enabling qualifying organizations to cover eight weeks of payroll expenses. As of April 19, the PPP had run out of money, and additional funding was locked in a political tug-of-war between Republicans and Democrats. A second wave of funding is likely to pass soon, however.

Money, relief, and the national debt

Before the onset of COVID-19, the national debt was already swelling. And the final bill for coronavirus relief will likely send that number to unprecedented levels that have serious consequences. That said, most economists seem to believe—as of right now—that the combination of the ability of financial markets to absorb this debt, consumer demand in a post-COVID-19 recession, and low interest rates place the US in a strong position to initiate relief efforts and get the economy back on track.

The more critical issues are long-term. COVID-19 debt will remain on government balance sheets for years and, possibly, decades to come—especially as the Baby Boomers continue to age, further changing the demographics of the country and stressing entitlements programs. Policy changes to deal with the debt could include raising the retirement age, increasing taxes, and heavy government spending cuts.

What small business owners can do

While the government continues to hash out the details of future stimulus packages, small business owners should be proactive and take steps now.

  • All levels of government are working on packages and programs to help local businesses survive. Check with local government entities and visit the SBA website. Once funds are made available, the SBA and banks will again process claims and applications. Become familiar with the loan forms and gather the required information so the application process can begin. Stick with the tedious process and attempt to get the money as soon as you can, given the possibility it will again run out—first come, first served.

  • Make a three-month financial plan. Speak to suppliers, landlords, and lenders to explore options for offsetting costs.

  • Develop a business plan for how to survive the changes in a post-COVID-19 world, with a nod toward how customers may behave, how services and/or products can be made available online, and how to market the business’s adaptations and offerings for regular and new customers.

What we can do

At the start of this post, we mentioned that it might be more appropriate to look at the illustration of the COVID-19 microbe as less of a sun and more of a naval mine–for good reason. The only way to consider the mind-boggling numbers—from infections to the number of unemployed to the stimulus dollars—is that this is a war. As in other wars, when national debts have historically skyrocketed, it will take time to recover.

At Morris Southeast Group, we are holding firm to the belief that we are all in this—and will get through it—together. And if history is any guide, the eventual aftermath of this shock event will see renewed success for our economy and small business owners.

We are here for you and the small businesses in our communities. We hope you join us in shopping these businesses if they are open during quarantine and as restrictions slowly ease.

If you have any commercial real estate concerns or questions, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Can You File a Business Interruption Insurance Claim to Survive COVID-19?

Can You File a Business Interruption Insurance Claim to Survive COVID-19? on morrissegroup.com

Does business interruption coverage provide protection during a pandemic?

As commercial property owners and their tenants continue to seek new ways of coping in a COVID-19-weary world, they are looking at ways to recoup some of the losses incurred as a result of preventative shutdown and isolation measures. One area getting a lot of attention is Business Interruption/Income Insurance (BI).

Designed as a means of covering physical damage or physical loss, BI is typically an add-on to commercial property insurance policies. While that certainly seems pretty black and white, there are gray areas—and COVID-19 is shining a spotlight on the gray. The question for policyholders, carriers, courts, and governments involves determining how and if a pandemic meets that standard.

Three critical areas of business interruption insurance

Generally speaking, there are three key areas when it comes to BI:

  • Business income coverage provides for sustained loss of income due to a suspension of operations by a covered cause that resulted in the physical loss or damage to the policyholder’s property.

  • Contingent business interruption coverage extends sustained-loss coverage to when the physical damage occurs at another property, such as at a customer or supplier. Any damage that impacts the income of the policyholder may be covered, as long the damage is listed as a covered cause in the holder’s policy.

  • Order of civil authority coverage provides for BI losses when a civil authority prohibits or impairs access to the policyholder’s property.

Policy language and COVID-19 coverage

It almost goes without saying that policyholders and insurers are currently at odds—or will be for years to come—as a result of COVID-19 and the terms of BI coverage. In the vast majority of cases, the resolution of any disputes is based on the wording in individual policies and previous court decisions.

  • The first prevailing concern is the idea of “covered cause.” Most BI policies are cause-specific, and many of the reasons leading to a claim are disaster-related, such as hurricanes, earthquakes, or fires. Crucially, as a result of the 2003 SARS outbreak, the insurance industry added an “Exclusion of Loss Due to Virus or Bacteria Endorsement” to most BI policies, which likely means the pandemic won’t be covered. In addition, courts have ruled in the past that contamination does not necessarily constitute “physical damage,” a term that is critical in filing a BI claim.

  • This same idea applies to contingent interruption coverage. Again, this is a loss incurred by the policyholder as a result of physical damage elsewhere, such as at a supplier. These claims can only be filed if the damage is listed among the specifics. And, depending on the policy—a virus is likely excluded and not a listed reason.

  • As property owners find the margin for filing a BI claim shrinking, many might look to submitting a claim under the civil authority clause, since this clause does not necessarily require physical damage. Again, looking at previous court decisions, claims filed here were typically rejected because it was determined these orders were issued to prevent future damage or—in the case of COVID-19—to protect the labor force. There is a case in Louisiana, however, in which a restaurant is claiming that the state’s COVID-19-related public gathering restrictions triggered the civil authority provision.

What a policyholder can do now

Despite the intricacies of policy language and what may be some lengthy legal battles over claim disputes, it’s imperative for policyholders to be proactive—because that’s what insurers are also doing.

  • Contact your insurer and request a complete copy of your insurance policy. Once in hand, look for the phrase “cause of loss to trigger coverage.” From here, check to see which coverages are included in the policy and the length of time of each. Look for the “Exclusion of Loss Due to Virus or Bacteria Endorsement” exclusion.
  • In addition to BI policies, it’s also important to review other insurances, such as general liability, pollution liability, workers’ compensation, and employment practices liability. It cannot be stressed enough that the current pandemic is uncharted territory, and it’s better to be prepared than to be surprised by anything that may or may not be covered.

Behind the scenes and out front

While this is sure to be a litigious process for some time and rates may certainly rise, there are also efforts happening behind the scenes to help ease the burden on policyholders and carriers. More than likely, the federal government will negotiate and pass additional stimulus packages while working with the insurance industry to create a solution to assist businesses. At the state level, bills have been introduced to address COVID-19 and BI coverage.

A legislator in Massachusetts, for example, introduced a bill that would “require insurance companies in the state to provide business interruption insurance to policy holders whose businesses have been negatively impacted by COVID-19.” Similar measures have been proposed in New Jersey and Ohio.

The insurance industry is fighting these efforts, however, for simple, fundamental reasons that go way beyond safeguarding their profit margins. Most policies have an exclusion for viruses; any legislation that alters the terms may violate the Contract Clause in Article I of the U.S. Constitution; and there simply won’t be enough money to pay out all such claims. Some form of federal assistance will be necessary, whether it flows through the insurance industry or not.

We know this is a lot digest, and we certainly understand how your anxiety may be shooting off in different directions. But as we’ve said from the start of this emergency, the team at Morris Southeast Group believes that commercial real estate investors and tenants will get through this crisis.

And we are here to answer any questions you may have. Call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

How Will Lenders Respond to COVID-19?

How Will Lenders Respond to COVID-19? on morrissegroup.com

Financial institutions face unprecedented measures in unprecedented times

April 1 was a key milestone on everyone’s mind—the first date that many payments would be due in a COVID-19-weary world on lockdown. In the weeks leading up to that date, the Federal government negotiated, passed, and signed a monumental $2 trillion relief package. Some CEOs, like Wayne Kent Taylor of Texas Roadhouse, announced that they would slash or surrender their salaries so employees could continue to be paid. Many banks began formulating new policies and programs, including payment deferrals and less-expensive lines of credit for small businesses and consumers.

Many stakeholders who could started pitching in, hoping to provide an economic bridge to weather this crisis. Then came reality, as the government signaled a continuation of the lockdown for 30 more days. May is now another critical milestone in fiscal responsibilities that may be missed.

What will the lending industry do as this crisis continues?

Where are we now?

When experts are asked to predict the economic impact of the coronavirus pandemic, they usually have a range of answers and scenarios. There is simply no way to predict anything accurately—other than there will most definitely be a huge financial fallout. One recent study, for example, ran more than 12,000 bank-held commercial loans through a worst-case-scenario algorithm. Factoring in a 35% plunge in CRE prices over the next two years, it predicts a dramatic increase in commercial defaults, up to 8% from 0.4%.

This study sees the hotel industry taking the most immediate hit, with a 35% cumulative default rate. This is followed by retail, with 16%. Office, multifamily, and industrial sectors would also see a loss but at a more measured pace.

Where are the lenders now?

The fear, of course, is that once borrowers begin missing payments, defaulting on loans, or permanently locking doors, the lending sector will be the next domino to fall.

If there can be any kind of silver lining in all of this, it’s that today’s crisis is not like 2008, when the financial sector was blamed for wrecking the economy while its recovery was made the responsibility of taxpayers. And it’s believed that banks will be able to weather short-term loan losses, although some lenders may become overwhelmed should the economic crisis linger.

Many analysts also think the current situation is an opportunity for the lending industry to step up—to prove that it is not abandoning communities, employees, or borrowers. Among the efforts already underway are donations to charitable organizations, “fee waivers; deferred payments for credit cards, auto loans and mortgages; loan modifications; low-rate and zero-rate loans and other accommodations.”

In addition, the initial $2 trillion stimulus package gave banks strategies to provide aid to businesses, including $350 billion in government-backed, low-cost or forgivable Small Business Administration (SBA) loans. This initial round of funding, however, has run out. As of this writing, the second wave of small-business-loan financing—about $370 billion—is set to be passed by Congress. Many analysts project that this money, too, will run out. And “first come, first served” is the order of the day for small businesses seeking these funds.

How lenders are preparing for tomorrow

Like many business and government sectors, simultaneous conversations are occurring to address the possible long-range implications and how best to prepare for them. Among the items up for discussion are executive pay cuts, suspending dividend payouts, and examining how long financial institutions can delay job cuts and changes to their business models. It is, without a doubt, a very delicate balancing act, and each effort will have its own share of consequences.

Naturally—and this can’t be stressed enough—it is simply too early to make any concrete predictions. While Congress is about to pass a fourth stimulus package—and more legislation may be on the way— it’s the progression of COVID-19 and the timing of a vaccine that will ultimately determine the longer-term response of the Federal Reserve, the stock market, and the lending industry.

How you can be proactive

Lenders have implemented steps to help consumers through the COVID-19 maze, including identifying at-risk borrowers and geographies, clarifying approval criteria and new procedures, and developing programs to assist those impacted by the pandemic. And consumers also have an opportunity to be proactive. They should reach out to their lenders to learn precisely what options are available while clearly communicating the financial impact of the pandemic and economic shutdown.

Commercial real estate property owners should collaborate with lenders and explore ways to provide relief to hard-hit tenants. Business owners with a mortgage may be able to seek some accommodations that salvage cash flow in the short term, as well. In most cases, lenders have a vested interest in hammering out arrangements that keep borrowers solvent—and to stop the potential fall of financial dominoes that could wreck the economy.

At Morris Southeast Group, we are holding firm to the belief that we are all in this together. To that end, we are here for you. If you have questions, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Rent In The Time Of Coronavirus: Tips for CRE Landlords and Tenants

Rent In The Time Of Coronavirus: Tips for CRE Landlords and Tenants on morrissegroup.com

Proactive advice for landlords and tenants who are navigating the COVID-19 crisis

As soon as the coronavirus began its relentless march around the world, one phrase was repeated by world leaders, experts, local officials, and neighbors: “We’re all in this together.” In many ways, that sentiment applies as we all try to negotiate the economic impacts of the COVID-19 pandemic. This is an all-hands-on-deck moment for an overwhelming majority of industries, including commercial real estate (CRE).

While many aspects of the emergency are unpredictable, it has certainly brought us together because we are all worried. The pandemic comes with a giant question mark: How do we do business today to prevent a domino effect tomorrow?

What landlords can do

In many ways, landlords are caught between a rock and a hard place—wedged between compassion for the economic plight of tenants and their own financial obligations to lenders and tax collectors. Given that position, landlords may want to use a multi-pronged approach, one that can adequately balance both short- and long-term issues. Here are some crucial steps:

Review leases. Looking closely at the terms helps property owners understand their rights. Still, they should also know that some of those rights may be limited due to crisis-centered government regulations and social pressure. Miami-Dade is one locale that has already banned commercial evictions during COVID-19. That being said, this review will help landlords proceed in an informed way when meeting with tenants.

Review loan documents. Many CRE loan documents contain clauses requiring lender approval for any lease amendments—which may be necessary when instituting flexible arrangements.

Meet with tenants. Looking at the big picture, the coronavirus shutdown is temporary. When life returns to normal, it will be important for a property owner to have fully operational tenants rather than a row of vacant spaces. The sooner tenants can be back in business, the quicker property owners can. Meet with tenants to collaborate on strategies to smooth this transition.

Be creative and flexible. Learn what tenants need and explore ways to achieve a result that works for everyone. With an eye toward both tenant survival and owner loan obligations, solutions can take several forms:

  • Short-term rent deferment (with repayment made in monthly increments or at the end of the lease, once the economy is up and running).

  • Temporary rent reduction.

  • Payment of only the tenant’s share of common expenses.

  • Applying the tenant’s security deposit toward rent and replenishing it after the crisis is over.

Whatever is decided should be put in writing and signed by all parties.

What tenants can do

CRE tenants also have their own concerns and responsibilities—to customers, employees, and their families. They have to develop a fiscal plan to survive. Depending on the business and the lockdown rules that are in place, this can mean operating on a limited basis or as a pop-up, or moving to an online format. Most potential steps involve talking with your landlord.

Be prepared. Just like the owner, the tenant needs to know the lease and all financial needs so the business can adjust and survive. Remember, it is usually in the landlord’s interest to maintain viable tenants long term, so carefully evaluate if you can weather the storm and communicate the steps you are taking to do it. As in any negotiation, both parties will have to find common ground.

A brief word about clauses and provisions

Any discussion of how to prepare wouldn’t be complete without a word about business interruption insurance, civil authority clauses, and force majeure. As both owners and tenants seek ways to stay afloat, these three items are in the spotlight:

  • Business interruption insurance is usually added to property insurance or as part of a broader insurance package. It’s most often used to compensate for lost income should a business need to close down as the result of a fire or natural disaster. Typically, it covers operating expenses, payroll, taxes, loan payments, or a move to a temporary location until any damage is repaired. Unfortunately, due to the outbreak of SARS in 2003, most business interruption coverage now contain an exclusion for losses due to virus.

  • Civil authority clauses, an uncommon form of coverage, are designed to protect landlords and tenants from monetary losses if public authorities bar access to their commercial properties.

  • Force majeure is a provision that relieves parties from performing or completing contractual obligations as the result of some a “superior force,” typically a natural disaster.

Because of the current situation, what constitutes a “natural disaster” is now more of a gray area. It’s unclear how insurance companies and the judicial system will interpret each of these categories, but be aware of how they may apply to your situation and any negotiations.

Morris Southeast Group is here for you

On March 27, the White House signed the CARES Act, a $2 trillion coronavirus stimulus package that includes economic stimulus funds to assist small businesses, consumers, industries, and state and local governments. While this is undoubtedly a tremendous fiscal help, receiving these funds will require aggressively pursuing small business loans and other assistance. And this money won’t go far if we fail in our relationships with one another.

It’s a bit like the scene at the end of the classic film It’s A Wonderful Life. The people who filled the Bailey house didn’t automatically show up to help George. That kindness was the result of his years of cultivating relationships. And as corny as all that may sound, our relationships with one another are going to help all of us manage this crisis—and serve everyone’s practical long-term business interests.

Relationships have always meant a lot to us at Morris Southeast Group. As we all look at the question marks ahead, our team is here for you. We will get through this together.

To learn more about what Morris Southeast Group can do for you now and in the future, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Commercial Real Estate as an Economy Indicator

Ken Morris spoke with Dave Kustin of ContentBacon about the impact of the COVID-19 pandemic on commercial real estate. They talked about what property owners, landlords, and tenants are doing—and may do—during the current crisis, as well as the CRE outlook in the short and longer terms.

Key Takeaways: What You Need to Know About the Current CRE Climate

  • Cashflow is king. Tenants and landlords may work out deals to pay rent.
  • Evaluate the “act of God” clause in business interruption insurance policies.
  • Business survival is the priority, but commerce never stops. Organizations with strong business plans are already preparing for the aftermath.
  • Renegotiations of terms may be possible, based on short-term needs and long-term interests.
  • CRE prices may adjust downward but money has been sitting on the sidelines to take advantage. This adjustment could be offset by low interest rates.
  • Landlords and owners should adopt a cooperative tone—and communicate.

Our team at Morris Southeast Group is here to help support you during this difficult time if you have any commercial real estate questions or concerns. To learn more about what Morris Southeast Group can do for you, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Virgin Trains USA’s Impact On SoFlo CRE

Virgin Trains USA’s Impact On SoFlo CRE on morrissegroup.com

For developers, it’s all aboard

When it comes to commercial real estate, railroads have long been considered a development incubator. Capable of moving people and goods across all distances, rail is a big reason why East Coast cities boomed, why the west was won, and why Henry Flagler was able to attract tourists and developers to South Florida. Wherever a station popped up, hotels, restaurants, retail, saloons, and homes were sure to follow.

But somehow, as the rest of the world developed its rail systems, embracing high-speed and efficiency, trains in the United States slowed in favor of an interstate highway system. Our network of highways had incredibly positive impacts on the country. But today, we’ve also seen some of the other consequences of that decision—suburban sprawl, downtowns that have deteriorated, and traffic congestion.

A new look at rail

When Brightline entered the conversation in Florida, it offered a new glimpse into what rail could do for the region. The goal was a high-speed system linking major cities with centrally located stops along a good portion of the Florida peninsula. This grand but controversial plan held the promise of new development opportunities along the route and in a radius surrounding each of the stations.

While there was certainly some development, things seemed to slow as Brightline’s profits also became sluggish. That all changed, however, when the rail company entered into a partnership with Richard Branson and his Virgin Group, a globally recognized brand led by a globally recognized figure.

Virgin Trains USA’s broader vision

As a global travel giant, Virgin has already conquered air and sea and, perhaps someday, it will conquer space. It’s really no surprise then that Branson would turn his attention to rail, especially since his new adults-only cruise line, Virgin Voyages, leaves from Port Miami. By partnering with Brightline, he has expanded his ability to move people to his own products.

Within months after announcing the partnership, new station locations were announced. Joining the current stations—Miami, Fort Lauderdale, and West Palm—are Port Miami, Aventura, and Boca. In addition, tracks have already started to be laid from Orlando International Airport to the West Palm station, ultimately bringing Central Florida tourists and residents to Port Miami. In other words, Virgin Trains USA will become the only intercity rail system to link an international airport with a major cruise port in 2022.

For developers, the partnership may be an exciting one

Cities up and down the corridor are all vying for a piece of the rail pie. In locations where Virgin Trains USA stations already exist, projects are underway and open. Florida East Coast Industries, for example, has already completed two office buildings at Virgin’s Miami Central Station and is building two apartment towers in Miami. That same company also recently opened Park-Line Palm Beaches, adjacent to Virgin USA Train’s West Palm station. The 26-story building has 290 Alexa Smart Home System apartments and 14,000 square feet of ground-floor retail space.

At the same time, there is talk of Tri-Rail operating trains on Virgin’s rails to fill in the station gaps. That, along with a discussion of additional stops, travel hubs, and bus and light-rail linkages, has seen several new trackside plans incorporating space for possible terminals. One such location is University Station in Hollywood, where the city is looking for a mixed-use development on 2.5 acres of city-owned land. Other cities, meanwhile, are creating master plans for additional townhomes, apartments, hotels, and retail spaces.

There’s more rail on the horizon

There has been momentum building with the Virgin Trains USA entry into the Florida rail system. Proposals already on the table include extending the rail link from Orlando to Tampa, as well as a hyperloop, a freight-capable line between Orlando and Miami, traveling down the center of the peninsula along the western edge of Lake Okeechobee.

It will be interesting to see what rail may do for CRE development in South Florida—and the impact could be significant. To learn more about what Morris Southeast Group can do for you, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

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