The Delayed Crisis: The Entire Real Estate Industry Adapts To The Global Pandemic
Since March 22, when the Governor of New York issued a stay-at-home order, New Yorkers have been housebound. They are staying connected through Zoom with friends and family all over the world while sharing poetry, music, recipes, and anecdotes about the unexpected tribulations and beauties of sheltering in place. Who has ever watched so many movies with their teenaged kids, or cooked so many meals? And for so many, who has ever worked such long hours?
Companies all across the globe, large and small, have been making difficult decisions: how many to furlough, how many to lay off permanently, how many to switch to part-time? In the New York real estate world, no landlord about whom I have heard expects to collect full rent in any of their buildings. Retail space tenants in particular, with no pedestrian traffic and fear of physical contact, feel unable to pay premium prices in this environment for benefits which the space no longer confers. At the same time, landlords in New York are not benefiting from any government programs. They still have costs for mortgages, taxes, staff, and maintenance. The buck keeps getting passed from hand to hand; probably the Federal government ultimately ends up holding it. That outcome, however, remains in the future. For now, everyone is doing their best to stay afloat.
Since the residential real estate sales business books deals 60 to 90 days before they close, the biggest challenges for the brokerages and brokers lie ahead. Most are still closing deals made during the first quarter. Some bank appraisals happen virtually; others involve allowing the appraiser access and making certain the property is uninhabited when they come. Closings are challenging given social distancing requirements, but they are taking place. The principals don’t attend, the documents are almost all prepared in advance, and a few people sit down, sometimes in separate conference rooms, to consummate the deal. This part of the business has been deemed essential by the Empire State Development Corporation, so the participants are not coloring outside the lines.
Nonetheless, many closings experience delays as financing can take longer to obtain and managing agents, who orchestrate the closings, can handle many fewer in a day with short staff and safety precautions. Buyers postpone with a desire to see which way the wind will be blowing in a month, or they request price accommodations from sellers to reflect the new realities of the market. In truth, no one has any idea what those realities may be. Will the market be down 5%, 10%, 20% by the time everyone is once again allowed on the street? Will it bounce back in two months, six months, a year? In an environment that is without real precedent (it is neither 9/11 nor 2008, although resembling both in some ways) no one really knows. Both 9/11 and 2008 caused our market to fall between 15% and 30%, but strong demand and price increases redefined those markets within a few months. That may well happen this time too. So far, post-contract renegotiations that have taken place are at modest numbers, all under 7%.
The real challenge for brokers and their brokerage firms will come one and a half months to two months from now. At that time, the deals which would have been made starting in mid-March would be closing. But of course, very few deals were made in the second half of March. And fewer will be made in April, with everyone staying home. The Federal CARES Act, which was just passed to provide relief for small businesses and independent contractors, specifies that the money (a 250% multiple of average monthly payroll for the companies) be used to sustain payroll and pay rent, with a caveat that it is meant to be used to underwrite businesses over the eight weeks following receipt. But for residential real estate sales firms in shelter-in-place states, that will not carry them back into financially viable times.
Especially in urban, high-rise areas all over the country, property listings and sales have slowed almost to a standstill as the person-to-person contact required feels too close. These markets will come back; they always do. Sheltering at home has made people everywhere more aware of the importance of where they live. Have they been as comfortable there as they would like? Do they appreciate their home more now, or do its flaws seem more obvious? Is this where they want to remain after the crisis passes? As buyers feel more secure, and price levels more established, a flood of interest in moving will overtake the country. It happens every time.
The trick for real estate agencies and agents, as with so many businesses and individuals throughout the country, is to manage cash flow today so as to be sure that when the wave of new business comes, they are there to ride it. In the words of real estate brokerage analyst and advisor Mike DelPrete concluding a recent webinar on COVID-19 management strategies for brokerages: Step 1: Be Around For The Recovery. Step 2: There Is No Step 2. It’s all about Step 1!