Why Furloughed Developments May Need Modifications
In the face of the coronavirus crisis, investors are well advised to review project budgets, assess capital sources and stay ready to adjust their strategy, notes Derek Weissman of Procida Funding & Advisors.
By Derek Weissman
Multifamily developers may wish to review their construction project portfolio and consider issues like material requirements, on-hand inventory, order status and evaluating critical path on their completion schedules. With supply chains constrained and lead times getting longer, will real estate developers have access to critical materials when they need them?
It may be necessary to adjust order schedules, and consider alternate suppliers. Financial budgets may have to be revisited too, in case of material-pricing delays, developers must be re-underwriting the entire project and increasing the soft cost and carry to cover the anticipated delays. And even if developers have access to construction materials, consider the impact shelter-in-place and other restrictions will have on the labor force.
Existing projects will also have their issues. As residential and commercial tenants face COVID-19-related financial strains, will they be able to meet their rental and lease obligations? In New York State, for example, a bill suspending rent payments for certain residential tenants and small business commercial tenants, and certain mortgage payments for 90 days, is being considered. Also in New York, Governor Andrew Cuomo announced a 90-day moratorium on evictions for residential and commercial tenants. These moves raise questions about how investors and operators will keep up with their own payments if the revenue stream becomes challenged, especially if lending dries up as it did during the Great Recession.
The ability to survive these and other COVID-19 business challenges will rest, to some degree, on the ability of a company’s teams to periodically revisit their plans—perhaps on a weekly basis during this fast-moving crisis — and to quickly come up with contingency strategies. It will be helpful to be conservative when it comes to revenue intake, considering, for example, how a three-month delay in a new opening will affect an organization’s budget. That kind of delay isn’t far-fetched, especially since the timetable for critical processes like inspections, signoffs, and obtaining a CO will all likely be delayed.
These steps and others are only part of a crisis-response plan, however. Once a portfolio has been examined, and projections and budget revisions have been considered, developers, investors and operators may all wish to consult with their lender about existing debt obligations, and access to credit lines. Doing so in a timely manner, with detailed and transparent documentation, may enable a lender to be more flexible about releasing capital and possibly renegotiating loans and credit lines.
LONG-TERM VIEW IS CRITICAL
Even as developers, investors and operators formulate nimble, short-term responses to this situation, they should not lose sight of the long-term focus. After all, the fundamentals of multifamily real estate are still solid. Driven in part by cultural and demographic changes—thanks to the current preference of Millennials for urban living—multifamily demand is also likely to be bolstered by the economic upheavals that have arrived with COVID-19. Many people—who may have been considering the purchase of a single-family home—are likely to defer that decision as they tighten their belts in response to recent economic shock waves.
At the same time, real estate developers and investors may want to consider the way that COVID-19 and other behavioral changes could drive lasting changes in the market. For example, with the rise of multi-use development, an increasing number of properties have first-floor retail space that relies heavily on foot traffic. But even before this pandemic, an increasing number of people were already turning to online shopping; and mandated social distancing is driving even more to the e-commerce channel. Traditional restaurants and other merchants will not disappear, and the current mandate for social distancing is likely to fuel a resurgence of in-person shopping after this crisis passes. But online competition will also prompt brick-and-mortar merchants to develop new ways of attracting and retaining customers.
Additionally, collaborative workspaces have become an integral part in the office sector and even appear in many multifamily developments. Right now, of course, even though more people are working remotely, they’re doing so from the privacy of their residence in an attempt to maintain social distancing. Will this behavior become baked in, or will individuals—who are, after all, hard-wired to be social beings — return to the collaborative workspace over the long run?
Successful real estate investors, developers and operators will step back and see what’s been successful, and consider whether modifications are needed. The ones who do so in a methodical, effective manner will come out on top.
Derek Weissman is vice president and head of asset management at Procida Funding & Advisors.