The effect of that pause will begin to surface over the coming months as COVID-19 continues to reshape how we live, play and work. And the impact will continue to vary in each city and state depending on local restrictions and conditions.
Uncertain about the fallout for JWB Real Estate Capital, a single family, real estate investment company with more than 3,500 properties in
Jacksonville, Florida, YPO member Alex Sifakis, President of JWB, conducted a stress-test in March. Assuming a worst-case scenario of a 10% decline in home prices, 60% decline in sales, and only 70% rent collection, they looked at how much money they would lose and what corrective actions they would have to take to stay afloat.
“That stress-testing was really helpful for us because it gave us clarity on the worst-case scenario and the likely scenario, and what we would do in each situation. That enabled us to sleep at night and be able to think past tomorrow and strategically,” says Sifakis.
Here are a few lessons Sifakis learned from pivoting during the pandemic and his insights into what to expect in the real estate market going forward:
Supporting remote work
As all but essential workers stayed home, real estate companies like JWB had to invest in some structural changes to make that possible. Although its employees already had access to laptops and cloud services, approximately one-third of its residents came into the office to pay rent. The company changed its policies and procedures to require online payments, arranged an electronic money order alternative for residents without computers and began conducting lease signings over Zoom. “In addition to the potential health benefits, there has been a tremendous amount of efficiency with it, in our employees’ time and, therefore, cost,” says Sifakis.
Being willing to pivot
Most companies had to confront their ability to work remotely and their willingness to change quickly in the face of an unprecedented challenge. “Every year we go through probably 20 different black swan scenarios that could massively impact our business, and we’ve planned out what would happen in each of those, but a pandemic was not one of them,” says Sifakis. “We had to very quickly come up with a new plan and then pivot accordingly to change how we were conducting business to accommodate for it.”
Marketing to a new reality
When sales dropped 40% in March, JWB shifted its marketing strategy to a COVID-appropriate message. They compared the market to 2008, Sifakis says, to show that an investment property purchased at that time not only increased in value but provided a source of cash flow as well. The messaging worked. “In April, we sold 43 houses, which is more than we sold in January and February, and we’re seeing that trend in the same direction in May,” says Sifakis.
Staying ahead of distress
One of the ways to avoid distress as a business leader is by staying in touch with your tenants and working with them to solve any existing financial problems. Sifakis says that they helped individual residents and businesses get assistance, find employment, stay open, procure personal protective equipment and more. He attributes this open dialogue to a 97% collection rate in April, which far exceeded their expectations. Communication with lenders is equally important to understand what forbearance and loans are available at the federal, state and city levels and how they can impact your business.
In Florida, the residential market is seeing an increase in transplants from New Jersey and New York that have stricter stay-at-home orders or more restrictions on the economy in general. “The shift toward markets in the south will continue and accelerate. That’s something we’ve been seeing for a while in population growth trends,” says Sifakis. “There will be more growth in the lower tax southern states — Arizona, Texas, Florida, Georgia. Those markets are going to be better long-term bets than the Northeast.”
The new office order
Going forward, the market for office space faces two competing forces: a decrease in demand as a result of more employees working remotely and an increase as companies will have to create social distancing at the office. Sifakis says to expect a decrease in demand over the long term as social distancing may only last until a COVID-19 vaccine is developed, but that companies are likely to stick with remote work, even if on a part-time basis, to save significantly on operating costs.
“Figure out how you’re going to structure the deals and how you’re going to close on those now so you’re ready when the opportunities come.”— Alex Sifakis, President of JWB Real Estate Capital
Retail, already overbuilt in the United States, is now facing store closures and an increased demand in online shopping. Sifakis says that shift from brick-and-mortar to online will result in a need for industrial and warehouse spaces for fulfillment. Expect developers to continue to reinvent shopping centers and retail spaces into more community-centered models by adding residential, experiential retail, unique food halls and more. “It’s going to be critical to reposition real estate portfolios in the future,” he says. “Typically, in and around urban centers along transportation routes is going to be a great opportunity for industrial and retail centers.”
Preparing for distress and opportunity
There are very few transactions in the commercial market right now, as a result of companies adjusting to the new reality — remote work and a decrease in retail and travel. “There’s a lot of uncertainty, and uncertainty typically does not help people make big buying decisions,” says Sifakis. However, with economic distress and uncertainty comes opportunity and the time to get capitalized for that is now.
“Work on your team, line up your financing to be ready to take advantage in six months or a year whenever the deals pop up,” says Sifakis. “Figure out how you’re going to structure the deals and how you’re going to close on those assets now so you’re ready when the opportunities come.”
For more crisis leadership stories like these, check out the COVID-19: Leading Through Crisis page on YPO.org. All YPO members can find breaking news, offer insights and view current discussions happening about COVID-19 impact within the YPO community on the YPO member-only platform.