Preventing the Pending Collapse of the Real Estate Market

reprints


The commercial mortgage-backed securities (CMBS) market has essentially collapsed and the broader $20 trillion commercial real estate market is on the verge of collapse as well. We still have time to prevent this catastrophic event, but we need government intervention now. 

It’s been just a few weeks since the global coronavirus pandemic started impacting our daily lives, and some landlords are already not being paid rent. Things may get materially worse with economists at the St. Louis Federal Reserve predicting that the US will lose 47 million jobs, leading to an unemployment rate of over 32%. In my estimation, up to 90% of all commercial tenants in the US will not pay their rent next month.

SEE ALSO: Bungalow to Demolish 201-207 Moore Street for Second Brooklyn Film Studio

The domino effect of landlords not having rental revenue will potentially force property owners to default on their mortgages. This will in turn force banks to write down loans and attempt to raise capital to cover losses, in an environment where capital markets are paralyzed.

This is nothing like 2008. This is not the result of high leverage, risky loans. This is affecting the entire real estate market, including sectors that have historically been considered the most recession resistant. Today, even the safest investment isn’t safe if people across all sectors can’t pay their rent. We are not talking about office or hotel properties, we are talking about all classes, most importantly multifamily. If nobody can pay their rent, there can’t be a market.

The only way to avert a complete financial system meltdown is to have the government immediately either a) mandate a temporary stop on rent payments to property owners along with banks giving a forbearance on debt service obligations or b) follow our Canadian friends from the north, with their Commercial Lease Rent Deferral Program that indemnifies quality landlords for losses incurred as a result of granting a rent deferral, pursuant to a commercial lease for business premises, to qualified businesses that have been directly impacted.

To reiterate, there either must be an immediate forbearance period for tenants, owners and lenders, basically a “Pause Period” for the next 90 days with optionality to continue  on a month-to-month basis, or the government must backstop all qualified commercial rent payments.

If the Government doesn’t step in by May 1st at the latest, we will have a run on the stock market and banks. The result will be materially worse than the Great Depression and more akin to a “Great Paralysis” where nothing moves or has any value.

Greg Kraut is the co-founder and CEO of New York-based KPG Funds