Media attention has started to pivot to commercial real estate markets as 1Q20 earnings releases of Property REITs, Mortgage REITs, Hotel Owners/Operators, and banks with significant real estate exposure become public. While the general focus remains on changing underlying fundamentals stemming from the record rise in unemployment, the structural shift to work from home and what that could mean for the office market, the acceleration of existing retail trends which has already led to several high profile bankruptcies, and the dramatic drop in hotel revenues, a forgotten part of the story is the positive impact the Paycheck Protection Program (PPP) has had (and will continue to have) on commercial real estate.
On March 13, 2020, the Covid-19 pandemic was declared an emergency in the United States. This declaration paved the way for the closure of states under “Stay at Home” or similar government orders across the US which in turn led to the closure of non-essential businesses nationwide. While these actions had the noble goal of slowing the spread of the Coronavirus to save lives, it also crippled small businesses who no longer had access to their physical locations or customers.
To aid small business, the Coronavirus, Aid, Relief, and Economic Security Act or the CARES Act was signed into law on March 27, 2020. Within this act the PPP was authorized to be created and administered by the SBA under the guidance of the Treasury Department. The PPP, originally sized for $349B but later upsized to $659B, allows for complete loan forgiveness so long as the funds are utilized for specified purposes. One of those specified purposes, which can be up to 25% of an individual loan amount or approximately $165B for the entire program, is the payment of rent or mortgage interest.
THE PPP HALO EFFECT
To the surprise of most real estate professionals, the April remittance cycle was better than expected. May’s payments have been mixed but there have been some surprises to the upside (outside of many malls where collections remain severely impaired in many areas). While hotels, which have seen historic declines in revenue per available room, or RevPar, have struggled some smaller hotel operators are making payments. Additionally, what was supposed to be the weaker areas of retail (strip centers, grocery anchored centers, etc.) have held in better than premium properties in terms of rent collection from underlying tenants. Even WeWork, whose business model largely targets smaller tenants by design, reported that they collected 70% of the expected lease payments for April. So what gives?
Many are crediting the halo effect of PPP funds, which have targeted the smaller tenants and property owner/operators, for better than expected or even accelerating rent payments. These funds, which started getting remitted in April for the first tranche of PPP funds and May for the second tranche, have started filtering through the economy and may provide a backstop for smaller commercial real estate owners and properties during the eight (8) week period that starts when the funds are disbursed. During this period, stretching from April through the end of July, the commercial real estate market should benefit from the de facto stimulus provided through the PPP.
POTENTIAL SIDE EFFECTS
The intention was that PPP funds should be forgiven. Even the Congressional Budget Office when scoring the CARES Act believed that 92.5% of the money would not be repaid. However, the risk is that businesses will not utilize the funds properly and will end up even more indebted than they are today. As such, it is of paramount importance that the commercial real estate industry offers support to those entities that received PPP loans in order to maximize the amount of loan forgiveness received and thereby increase the creditworthiness of our borrowers and our borrowers underlying tenants.
SitusAMC is the leading independent provider of advisory, strategic outsourcing, talent and technology solutions to the commercial and residential real estate finance industry. We help our clients realize opportunities in their real estate businesses through industry-leading services and innovative technologies that drive operational efficiency, increase business effectiveness, and improve market agility across the entire lifecycle of their global real estate activity.
As a trusted solutions provider, SitusAMC has (i) aided a number of institutions with the processing of PPP loans, (ii) conducted due diligence and brokered secondary market sales of PPP loans, (iii) created technology and staffing solutions grounded in a consistent data driven, rules driven, automated process to facilitate borrower outreach, workflow management, and evaluation of PPP loans for debt forgiveness.