In the wake of COVID-19, the entire global economy has essentially been put on hold for the foreseeable future. Some people are already referring to this period as the “Great Lockdown”. These are strange times, they are cruel times, and they are – above all – unprecedented times. With over one-third of the global population currently living in lockdown, the modern world has truly never witnessed anything like this.
While Q1 data will officially be released next week, Goldman Sachs is predicting a 9% contraction for Q1 and a 34% contraction for Q2, bringing unemployment rates around the country into the mid-teens. China, the world’s second-largest economy, recently posted a 6.8% quarterly contraction in GDP for Q1. It’s the first Chinese economic contraction since 1976, which was primarily marked by the death of Communist Party leader Mao Zedong’s rule.
Historically, there has been a popular adage in real estate that regardless of how the economy may falter, “everyone needs a roof over their head”. However, with estimates of 20 million American workers being furloughed or laid off between now and July 2020, a lot of those tenants are struggling to pay for that roof. Over the next few rent cycles, collections are going to become a real issue in the commercial real estate space – and for a number of asset classes, they already have.
For the month of April, average hotel occupancy has floated around 22% and several large retail landlords have collected only 15% of their monthly rents.
While there is no hard industry-wide data for collections across manufactured housing communities, our outlook remains optimistic. During the Great Recession of 2008-2009, the manufactured housing REITs posted consecutive positive quarterly earnings and outperformed the entire real estate sector as a whole.
Mobile home communities tend to have a countercyclical demand because in times of growth, there will be some who need affordable housing, but in times of contraction, everyone needs affordable housing. While no investment is risk-free, mobile home parks do tend to exhibit more recession-resistant characteristics when compared to other asset classes.
In a downturn such as this one where unemployment is high, most investors would concur that it’s preferable to own a property where monthly lot rents are $250 versus a property where rents are $1,216 (the 2019 median rent for a one-bedroom apartment in the U.S).
While many tenant advocacy groups are proposing nationwide rent freezes and other short-term moratoriums, these are simply not viable solutions for the wide majority of landlords who must meet their monthly debt service payments. So, what is the solution? During this tumultuous time, it is all the more important for landlords to work alongside their tenants and remain compassionate and flexible.
We must be humans first and investors second.
As such, we’ve implemented several strategies at our mobile home parks to ensure a safe environment for all:
- Educate residents on how to apply for unemployment. Not all of our tenants have access to the technology that can allow them to stay informed and apply for unemployment. We have posted flyers and sent out community-wide correspondence informing tenants that we are available to help.
- Take advantage of CARES Act funding. Instruct tenants on the application process and be prepared to lend a hand if they’re having trouble accessing websites.
- We’re human. If we received a $1,200 check, there might be some inclination to pull the trigger on that new iPhone or the overpriced pair of shoes we’ve been eyeing. Incentivize tenants to make the financially prudent decision by offering a $50 discount off of the next rent cycle if they pay this month’s rent on time.
- Draw down on tenant’s security deposits and structure a deferred payment plan whereby they can replenish it over time.
- Structure payment plans where tenants can pay down balances over the course of a 6-month period. Be wise but remain flexible.
Tip: history has proven that there are always individuals who will try to take advantage of a situation like this one, so make sure that any delinquent tenants show proof of financial burden or unemployment.