For many landlords, April 1 represented the first time in more than a decade when they questioned whether their tenants would be able to pay rent.
Following years of gains, the coronavirus has had a swift impact on businesses across the country, many experiencing an immediate loss in income.
A lack of legal guidelines in Orange County on how to work with tenants unable to meet rent has prompted local landlords to make their own decisions on the matter.
The response so far?
Flexibility.
“Landlords are going to want to protect their occupancy at a time like this,” said Parke Miller, the local head of Dallas-based Lincoln Property Co., whose firm counts office and retail properties in its growing OC portfolio.
“I don’t foresee there being many evictions even if there isn’t a mandate passed” that would legally prevent such actions, such as the residential moratoriums passed in Los Angeles and, more recently, California, he said.
The impact on tenants varies across property and business types, from hard-hit shopping malls, to booming essential grocers and e-commerce distributors, to quiet office properties.
Here’s a sector-by-sector look at what OC property owners are doing to minimize tenant losses.
Retail Deferred
Rent reworked; new opportunity
Reports point to the retail sector as the most susceptible to coronavirus repercussions, with all non-essential stores and shops immediately losing revenue.
The sector was already on shaky ground—retail absorption was negative in 2019 due to store closures countywide.
Business at local malls that rely on foot traffic has come to a standstill, with landlords crafting rent deferral plans.
The area’s largest landlord, Irvine Co., is one example.
It owns three of the county’s six largest shopping centers, ranked by sales, according to Business Journal research:
• Newport Beach’s Fashion Island, with about $910 million in annual taxable sales, is the second largest in OC;
• The Market Place in Tustin is No. 4 with close to $570 million; and
• Irvine Spectrum Center is No. 6 with approximately $435 million
In a letter shared with the Business Journal, the property owner offered an optional rent-deferral program for tenants.
Beginning April 1, the company will defer all rent for 90 days, which will be paid back over a 12-month period with no interest, starting next January.
Even with rent flexibility, closures of already underperforming retail businesses are likely, notes Matthew Mousavi, managing principal and co-founder of Newport Beach-based SRS National Net Lease Group.
“This will exacerbate the situation big-box retailers have been struggling with for decades,” Mousavi said. “But these vacancies will create an opportunity for landlords to increase value, and bring in a high-end fitness chain or grocer, or even convert the space into apartments or hotels.”
OC’s largest mall with $1.8 billion in annual taxable sales, South Coast Plaza, shuttered last month and owner C.J. Segerstrom & Sons said on its website the mall will remain closed until an executive stay-at-home order is lifted by Gov. Gavin Newsom.
Same goes for large mall operator Simon Property Co., which closed properties nationwide, including Brea Mall, the Shops at Mission Viejo and Outlets at Orange.
“Many landlords are being forgiving and are working out new rent payment plans with their tenants, because they need their tenants just as much as tenants need them,” said Mousavi, adding that this has put property owners in a tricky position with their lenders, though there’s a bright spot there too.
“The new stimulus bill addresses flexibility for banks and lenders that work with real estate owners, as it is a multi-trillion-dollar industry that nobody wants to see collapse.”
Offices Open
Cleanliness, NOI
“Our first priority as a landlord has been paying attention to this heightened sensitivity to promoting health, wellness and safety above all,” said Miller, whose job description has expanded in recent weeks.
“We’re communicating with tenants more than ever,” he said, “emphasizing cleaning and sanitation at our properties while most of our buildings are empty.”
All of Lincoln’s local office properties, more than 7 million square feet, remain operational.
New leasing is on pause, Miller notes; he’s working with current tenants on rental strategies case by case.
“We aren’t making blanket rent deferral programs because each tenant and their current needs are unique,” he said. “But we are being flexible and doing what we can to protect occupancy.”
Landlords with many short-term leases will be the most vulnerable, a recent report by brokerage JLL suggests.
Irvine Co. has also worked to keep local office buildings open, though single-tenant sites do so “at the discretion of the customer.”
This flexibility shown by landlords should also be extended when making new lease deals, JLL said.
“Landlords currently negotiating leases with tenants may demonstrate a willingness to expedite discussions and potentially offer elevated concession packages to close transactions,” the report said. “With ongoing uncertainty, landlords are well-advised to acquiesce on small points in lease negotiations to ensure deals are executed and long-term NOI is preserved.”
Industrial Design
Benefit of Long-Term Leases
As operators of properties home to perhaps the best-performing sector of the moment—e-commerce—industrial landlords are well suited to weather the storm, some brokers suggest.
Tenancy for the sector also typically runs longer than other product types, hinting at security against vacancies.
The product type has fared well in recent years, with countywide vacancies hitting historic lows leading into the pandemic.
Newport Beach-based industrial investor CapRock Partners believes the sector will continue to fare well, with demand for e-commerce, logistics and manufacturing leading the way.
“Like others in the sector, we have long-term leases with strong credit tenants that puts us in a solid position,” President Jon Pharris said.
Still, CapRock has talked with companies in its portfolio, with properties in California, Nevada and Arizona.
“We are looking at our portfolio, especially tenants that might have more of a risk exposure, like those related to retail, restaurants and hospitality,” Pharris said. “We’ve changed our policies and we’re making sure companies are aware of the CARES Act and the options available to them.”
Though Pharris doesn’t see current economic turmoil as comparable to the 2008 recession, he notes that should there be a global or U.S. recession, rents will be affected.
“Industrial real estate continues to have several demand factors, but it’s imprudent to believe that industrial, insulated though it may be, will not have rental rate declines in certain segments,” he said.
“While industrial real estate should fare better than other classes [it’s not] immune to rental rate decreases.”
Multifamily Options
Evictions on Hold, Payment Plans
Gov. Newsom on March 27 signed an executive order banning evictions for residential renters through May 31 for those who can prove they’ve faced economic hardship.
It’s not a permanent moratorium; tenants can be evicted after May 31 and are still obligated to repay full rent.
Individual counties have instituted their own restrictions, but not Orange County, where policies vary by owner.
Irvine Co., one of the county’s largest apartment owners, issued a rent deferral payment of its own last month.
In a letter to tenants of its apartment communities, which total 60,000 units statewide, the property manager said it will let those unable to pay full rent to defer half of their April and May payments over six months without interest.
Custom options are available for those who “would like to discuss an alternative rent deferral arrangement,” Jim Krohn, president of Irvine Company Apartment Communities, said in the letter.
Essex Property Trust, a Santa Ana-based property manager with several OC projects, said it’s working with residents individually to create payment plans.
It also said it will not raise rents for 90 days through June 2020 by offering a “12-month lease renewal option with no rent increase on conventional leases.”
