On the one-year anniversary of China’s Wuhan lockdown, COVID-19 has become a part of everyday life and as we enter the new year, real estate borrowers and lenders alike will need to understand this new normal and face the reality that is fast approaching. In 2020, as the COVID-19 pandemic swept across the United States, many state and local governments instituted eviction moratoria and other protections for real estate tenants and borrowers. These protections created a window of opportunity for tenants and borrowers to negotiate reasonable solutions with their respective landlords and lenders regarding rent and debt payments amid the COVID-19 pandemic. This temporary period of restricted remedies also allowed courts to analyze legal arguments on how the COVID-19 pandemic impacts the real estate industry.
However, with court rulings forthcoming and many of these eviction protections set to expire in 2021, landlords and tenants as well as borrowers and lenders will be forced to have discussions regarding the realities of their industry and their ability to pay their respective rents and mortgages amid the ongoing COVID-19 crisis. Throughout 2020, lenders and landlords were forced to accommodate workout negotiations as their ability to evict or foreclose upon defaulting tenants or borrowers was prohibited. Many commercial real estate parties were able to come to agreements on what borrowers and tenants were able to pay, given the impact of the COVID-19 pandemic on their respective industries. As the legal protections are rolled back and the leverage shifts back into the hands of the lenders and landlords, we will likely see a trend of aggressive landlords and lenders and an increased number of evictions and foreclosures, especially in industries that are most vulnerable to the COVID-19 pandemic: retail and hospitality.
A number of COVID-19 vaccines have arrived, but they are not an immediate solution and they raise a number of issues for the real estate industry, including when vaccines should be required before entering a building as a customer or employee. As we move through 2021, inoculation levels will increase, which will decrease the likelihood of individuals contracting the COVID-19 virus and many people will return to essential functions: going to work in their office, taking their kids to school, grocery shopping and spending time with family. However, the retail and hospitality industries, which took a massive hit in 2020, are likely to continue to see low occupancy rates and a continued inability to pay their rent and mortgages. Unfortunately for those tenants and borrowers, landlords and lenders are not likely to be as accommodating as they were in 2020 as they will soon have the ability to evict or foreclose on properties that are underperforming.
Beyond the expiration of legislative protections, landlords may be less likely to negotiate workouts with their tenants as landlords’ lenders place more pressure on them to make their mortgage payments. Additionally, even if a landlord’s relationship lender was willing to continue to find workable solutions, there may be a large capital stack at play, including mezzanine or warehouse lenders, who will be focused on protecting their position more than being accommodating or helpful to the landlord/borrower. This is an important consideration because as the number of lenders increases, so too does the number of consents needed to make a loan modification or waiver. While those consenting parties may have been accommodating in 2020, while their strongest remedies (eviction or foreclosure) were restrained, we can expect 2021 to be a year filled with deliberate and decisive negotiations, and we are likely to see an influx in distressed assets as the year progresses, which in turn should create plenty of opportunity for those who know where to look.