As April rents loom, Phoenix real estate leaders grapple with potential losses

As April 1 approaches and some Valley businesses have gone two weeks without normal business operations, property managers and landlords in the region are grappling with the possibility that many tenants will not be able to make rent.

“Let’s start planning on April rent being a challenge for everyone,” said David Verwer, director of real estate operations for Mode Commercial, a Scottsdale property management company.

Verwer said his company mostly manages properties for owners who are out of state, so keeping communication with tenants and his clients has been crucial. The company started by reaching out to all tenants in properties they manage to gauge their status.

“Some are OK, they will be able to ride it out a little,” he said. “Some have no revenue at all.”

Handling each tenant situation is taken on a case-by-case basis, because each one’s needs are different and there are different resources available for different types of businesses, he said. The company is working to figure out what tenants’ needs are and respond in a compassionate way.

“How do we help you; how do you help us? Because we have bills to pay too,” he said.

Some Phoenix businesses have asked for rent concessions that will later be added on to the end of the lease, he said, meaning the company does not have to pay rent right away, but will end up paying the same amount over the lease term. Other options, like SBA loans or other relief coming from the federal government can also help tide businesses over until they are able to open again.

“A lot of tenants are in panic mode. There is a knee jerk reaction right now,” he said. “We are telling them, ‘Slow down, we’re not going to lock you out. Let’s see what you can pay.’”

‘Work with the tenant’

It is usually in a landlord’s best interest not to remove a tenant from their property, especially not during a time where it will be very difficult to find another tenant to take over the space.

“It’s generally a lot better to work with the tenant you have,” Verwer said. “If a landlord has space, getting some rent is better than getting no rent.”

Michael Pollack, owner of Michael A. Pollack Real Estate Investments, said that if a tenant is unable to pay rent, the landlord will also not be able to meet financial responsibilities like property taxes, loans, maintenance and other expenses.

“No one spoke in that wheel is capable of solving the problem,” Pollack said. “Only the federal government can, they have the printing press and they are getting ready to print.”

The federal stimulus package, along with other initiatives that could help businesses stay afloat, are likely the only saving grace for the real estate sector, he said.

“I don’t know one landlord big enough to absorb this type of thing all on their own,” Pollack said.

Pollack said he has tenants ranging from international companies to businesses with only one location.

“This doesn’t discriminate,” he said. “It hits everybody. I’m concerned about America, I’m concerned about the world. This is not a Phoenix, Arizona problem; it’s a national problem, a worldwide problem.”

Pollack said he has been fielding calls from tenants about rent, but said help has to “come from the sidelines” for the federal government to make changes to save businesses. Adjusting rent for tenants can put owners in default of their loans if they violate covenants in the loan, including an agreed-upon price range, so some landlords may feel backed into a corner.

Cheryl Lombard, president and CEO of Valley Partnership, an advocacy organization for real estate development, said building landlords have been taking requests on a case-by-case basis, including looking at individual tenants’ financials to see what, if anything, they can afford to pay.

“None of the responsibilities have slowed down for the developer or the building owner,” Lombard said.

Some plans that work for one landlord and tenant might not work for another, she said, so individuals are looking for solutions that work for them.

“Commercial developers have a large amount of people who are not wanting to or able to pay rent,” Lombard said, adding that landlords are likely going to want to work with small, locally owned businesses to help keep them open, and might want to be more flexible with a small business than a national chain.

“I would like to think an owner is going to look at things differently for a small mom and pop than a bigger chain,” she said.

The Cheesecake Factory, which owns Fox Restaurant Concepts, already announced it will not be paying April rent due to losses from coronavirus.

However, even if tenants and landlords come up with a plan for April, it is still unknown how long the closures and the resulting downturn will last.

“It is a possibility that this is an ongoing impact,” she said.

Source: Phoenix Business Journal

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