Christopher Miller, MBA | Specialized Wealth Management
Originally Appeared in Apartment Management Magazine
I wrote this article in late March of 2020, when all of us landlords were wondering which of our tenants would be paying their rent on April 1, and what we’re going to do if they don’t. As you know, my business focuses on helping my clients find replacement properties for their 1031 exchanges. Over the years, my business has focused on two major asset classes: Apartment properties in growing metropolitan areas and single-tenant, net-leased, buildings occupied by large corporate tenants with good credit. Although I think it is possible that we are looking at a repeat of our last recession, I am optimistic about my clients’ holdings since we have focused heavily on these two asset classes over the last 15 years.
I’ve been around long enough to remember a lot of pandemics – AIDS from the 1980’s, SARS, Ebola, swine flu, bird flu, mad cow disease, etc. My worry is, now that a precedent has been set, that our politicians will shut down the economy every time a new one emerges. My article this month will talk about the effect of such a shutdown on our investment properties.
The Bad: Hotels
Hotels, along with airlines and rental car companies, were the first place that the Coronavirus “drew blood.” As I have said in recent articles; hotels are similar to airlines in their boom/bust cycles. They are either doing great, or going bankrupt right and left. I am often asked “but what about companies like Hilton and Marriott? They are still around.” The reason that they are still around is that most of their hotels are franchises: They collect franchise fees from the real owners/operators of those properties. When that owner loses the property to foreclosure, a financially stronger investor will buy the property and continue to sent Hilton their franchise fees. When franchisees are ruined financially, Hilton wins!
The Bad: Office Buildings
It costs a lot of money to provide office space for employees. Today – in March – millions of people are working from home as part of “social distancing.” I’m betting that many of these employees will discover that they can work almost as well from home, and that they don’t need to fight traffic every morning and evening in order to be productive. At the same time, employers may be noticing that their companies are remaining productive despite their empty office facilities. Why continue to pay rent, utilities, cleaning and insurance on office space if it isn’t completely necessary? Even if employees are 20% less efficient working from home, would 20% more efficiency justify the cost of providing and maintaining office facilities? (I’m guessing that it doesn’t – it could be cheaper to just hire more people.) Just as this country’s TV repair shops didn’t close immediately, but they all did eventually, I think this could start a long-term trend that decreases demand for office space.
The Good: Necessity Retail
For the last several years, a lot of my clients have purchased interests in “Necessity Retail,” singletenant, net leased portfolios of properties. These investments make a lot of sense at this moment: Tenants include CVS Pharmacy, Walgreens, Dollar General and O’Reilly’s Auto Parts. All of these tenants are currently open for business here in California when not much else is. By focusing on such tenants, we as landlords can limit our exposure during the next shut down or recession.
The Good: Apartments In Growing Metropolitan Areas
According to the U.S. Census Bureau, California’s population shrunk between 2018 and 2019; even during this last economic boom. Our population during what may now be remembered as the “Roaring ‘10’s” grew by a measly 0.66% annually – at the U.S. national average. If the economy slows down, we can expect our growth to slow down as well. Slowing down will hurt even more if we are starting at “average.” During recessions, people will move where the jobs are. The same areas of the country that I’ve been talking about for almost 20 years are poised to benefit: Texas, Florida, the Atlanta, GA suburbs. These areas’ business and tax-friendly climates have been attracting companies and workers from California for decades, and this rate could be poised to dramatically increase. Although rent growth may be stalling all over the country, I think that we’ll have more success filling units in Dallas or Orlando than in areas of the country that job-seekers are fleeing. After all: all these new employees will need places to live and to spend their new paychecks on.
Real Estate That Is Resistant To Unexpected Shocks
Since I wrote this article in late March of 2020, I don’t have the benefit of knowing what things are like while you read this in May. If we aren’t beginning a recession, then there is always another one coming in the future: and the chances are good that it will be something that we didn’t see coming. (Who would have guessed that the government would shut everything down?) Investments that make sense during a recession also make sense outside of one: for preparing for the next one. If we buy things that will always be in demand, we’ll be in a good position when they are the only places open. If we buy apartments in growing areas; then we’ll always have a growing pool of renters. I hope you and your family are safe and healthy. If you have any questions, please call my office at (877) 313-1868.