2021: A Space Odyssey

11/19/20

If you look out your window, either at home or at work, your street probably looks pretty much the same as it did a year ago. I actually did so, and the only thing that stood out at home was an all-electric SUV in my neighbor’s driveway. That would not have been the case in 2019.

At my office, which is also in a residential neighborhood, I don’t see anything I wouldn’t have seen last year, nor is anything missing. The autumn leaves stir in the breeze, and the cars cruise by.

Looks can be deceiving, and in this case they certainly are. If we could see into the lives of the people in those houses, or those cars, we would surely find plenty of differences from what we would have seen 12 months in the past. Some have lost their jobs, or their businesses. Others have lost friends or relatives. Everyone has lost something.

One of the biggest and most common problems that many people now have is that they are struggling to pay their rent, whether it is residential or commercial. On the residential side, there are approximately 110-million Americans, or one-third of the population, who live in rented homes, and a lot of them were hard-pressed to keep up with lease payments even before the pandemic. Almost 4 percent of renters were evicted last year.

Now the situation is much worse. It is generally thought that at least 30-million people are living on borrowed time, so to speak, unable to pay the rent. For the time being, they are able to remain in their homes because the Centers for Disease Control issued a moratorium on evictions through the end of the year. A number of states have passed legislation to that effect.

I would assume that most of us do not want to see people put out on the street, but mandated forbearance on rent brings up a couple of questions. One is what happens when the moratorium expires, as we are not likely to return to full employment any time soon. My guess is that congress will address the problem, perhaps by the time you read this.

The other question is about the landlords. As businesspeople ourselves, we understand that owning and operating rental units is a business like any other, and we are talking about picking out that industry and telling its customers that they no longer have to pay for the product. Or, to be more precise, they don’t have to pay for it right now.

What if the government did the same thing to you? The public desperately needs your merchandise but doesn’t have the money to pay for it, so we’re just going to let them take it, for now. Of course you would want to do your civic duty, but you would probably expect some sort of relief from paying your suppliers. They, in turn, have suppliers of their own.

For the most part, though, eviction moratoriums have done little or nothing to backstop the landlords, who still have to pay mortgages, property taxes, maintenance and so forth. You might think that most rentals are owned by sprawling developers or real estate investment trusts, but that is not completely true.

More than 40 percent of residential units, 22.7 million out of 48.5 million, are owned by individual investors, who generally own one or two buildings. Sometimes referred to as “mom and pop” landlords, these investors are often people of moderate income.

I have a friend who makes his living as a public speaker, a career which came to an abrupt halt last March. He told me recently that he had always put his money into local apartment buildings, thinking that was a safe plan B if anything should ever happen to his primary occupation. “Now,” he told me, “people aren’t paying their rent.”

Someday the pandemic will end, and all the accumulated rent will come due. I don’t know how tenants, many of whom were struggling to begin with, will come up with all that money, or what recourse landlords like my friend will have.

On the commercial side of the ledger, things are considerably different. Business rentals are divided into three categories: office, industrial and retail, but it’s primarily that last one that concerns most of our readers.

At the end of 2019, the vacancy rate for retail space stood at 10 percent, which was more than double the residential rate. That is about the same rate it’s been since the Great Recession of 2008-2009, having reached a peak of 11 percent in 2010. Historically, though, those statistics may be misleading.

Before that recession happened, the retail vacancy rate was 6.4 percent, which was more in line with past experience. As the economy expanded over the following decade you would expect retail vacancy to go back down, but it never did. There are two obvious reasons for that.

One is the growth of online sales, which has increased over that decade from about 5 percent of total retail to about 15 percent. That trend is expected to continue, albeit more slowly.

The other reason is that, in spite of the first reason, we kept building more stores! It didn’t make any sense, seeing as we already had far more space than anyone else in the world, and our population was not growing very much.

The U.S. has nearly 24 square feet of retail space for every American. That’s 40-percent more than number-two Canada, and 10 times that of Germany. Even during good economic times it was getting to be a problem.

Now it’s totally off the hook. Since the beginning of the pandemic we’ve seen major store closings from venerable department stores such as J.C. Penney, Macy’s and Brooks Brothers, mall mainstays like Kay Jewelers, Victoria’s Secret and Gap, and free-standing chains including Pier I, Office Depot and Bed, Bath & Beyond. The vacancy rate has doubled, to 20 percent.

The law of supply and demand should have translated into more favorable leases for retailers over the past 12 years, and especially over the past eight months. It has, but unfortunately many retailers are not in a good position to make long-term commitments even at lower rates.

What has resulted, in many cases, is a sort of hybrid lease in which the landlord agrees to assume some of the risk by taking all or part of the rent as a percentage of sales. That way the retailer has lower expenses during lean times, and the landlord also has more skin in the game. He has more incentive to see that the property is well-maintained, safe and attractive.

Recently, though, landlords have come back with their own idea. “Now that we’re partners,” they argue, “how about sharing some of your online revenue as well?” Your ecommerce business, after all is built on the foundation of bricks and mortar, and those bricks belong to the landlord.

It’s a rapidly changing world and even though the pandemic may feel as though it has frozen everything in place, it will actually serve to accelerate change. Someday soon, after the bigger fish are fried, we’re going to have a lot of other things on our plates.

 

You can e-mail Kevin at kfahy@fwpi.com.

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