The CARES Act and Federal Reserve Policy:
A Response to COVID-19

Multifamily

• Of all the major property types, the CARES Act likely will have the greatest direct impact on multifamily, both in terms of tenant relief for various age and income levels, and for asset owner relief in the form of tax credits and suspension of loan payments.
• Aid for tenants will come in the form of $260 billion in additional unemployment benefits and insurance, which will help renters who were recently laid off or furloughed from their jobs remain in their units and pay their rent.
• Suspending payments through September for the federal government’s student loan program will support renters, who tend to be younger and indebted by student loans.
• Tenants who have had a significant loss of income will also be able to apply for Housing Choice Vouchers ($1.25 billion is earmarked), which will help them pay their rent in market-rate housing.
• For asset owners, the legislation will allow for certain forbearance periods for multifamily owners who have GSE loans (Fannie Mae and Freddie Mac). However, as a condition to this forbearance, multifamily owners cannot charge late fees and/or evict tenants.
• For multifamily developers who currently have PBS projects, $1 billion has been earmarked to provide additional funds to help maintain and run operations of these properties.
• Though not included in the CARES Act, municipalities across the country have indicated that they too will enforce limits on rent increases and evictions, which could impact certain asset owners more acutely than others.
• The legislation is geared specifically toward standard multifamily assets, and the impact on both student and seniors housing remains vague. Student housing may face headwinds with a sizable international enrollment decline in the fall, which will also negatively impact university system revenue. Seniors housing may have to adapt to new ways of protecting the older age cohort, as the COVID-19 crisis represents a greater threat to that demographic. There is a lack of support for lease-up or other value add situations as well.

Office

• Office tenants at all levels, from large Fortune 500 companies to small businesses, stand to benefit from a combination of CARES Act relief and accommodative Federal Reserve policy, while considerable attention is being paid to supporting small businesses through the worst of the crisis.
• In addition to benefits for employees who have been furloughed, the legislation will create a $500 billion fund to make loans and loan guarantees to—or investments in—businesses. While the implementation of this process remains vague, the funding is expected to provide short-term relief and liquidity to businesses that need it most, including many office-using companies.
• Small businesses are expected to receive $350 billion, which is contingent on the loan funds being used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments. Crucially, lease payments are included in the provision, which will ultimately benefit office asset owners, who are less likely to have to endure missed payments or tenant defaults.
• Sector-specific stimulus, such as the $25 billion earmarked for grants to airlines and $4 billion to cargo carriers, will help major office markets such as Dallas and Atlanta, where airlines have a large presence and represent a material share of office occupancy.
• Further sector stimulus will be provided to “businesses critical to maintaining national security,” which likely includes companies in the aerospace and defense industry, such as Boeing, but also companies in the biotechnology and pharmaceutical spaces who are on the front lines of the COVID-19 crisis.
• Critically, the Federal Reserve will now be the backstop to the largest office-using employers in the country, as long as they have investment-grade credit, and will be the lender of last resort if those companies are unable to sell corporate bonds on the open market.
• Office as a product type remains on sound footing, despite the increase in telework arrangements. Even before the COVID-19 crisis, many technology and financial services companies allowed flexible work arrangements but continued major office expansions, often including more flex and amenity spaces rather than pure office buildouts.
• Other components of office real estate stand to benefit, such as life sciences lab space. While clusters across the United States were developing in urban areas before the COVID-19 crisis, established markets, such as Cambridge, San Diego and the Research Triangle in North Carolina will likely continue to expand as pharmaceutical and biotech companies become even more critical components of the post-COVID economy.
• Data center properties have represented a growth opportunity for investors during the current cycle, even before the COVID-19 crisis, and likely will continue to benefit from the increased demand for data services across all segments of the economy and population—particularly if more employers expand their telework policies.

Retail

• The CARES act will provide direct relief for consumers of retail goods, via direct payments of up to $1,200 per taxpayer, as well as provide $350 billion in loans for small businesses, of which many are retail-oriented local businesses. The retail sector will also benefit from relief to the unemployed and those in the middle- and lower-income brackets, who will continue to spend money on consumer staples.
• However, the overall impact on retailers has varied greatly during the COVID-19 crisis, with some tenants being hurt badly due to a lack of customers while tenants in grocery, pharmacy, and essential goods and services categories are benefiting as consumers prepare for long stays at home. Notably, several national and regional retailers have announced that they will not pay rent beginning as early as April 1.
• Retail tenants with large e-commerce footprints have best absorbed the economic impact from the current health crisis and stand to benefit from the relief provided to consumers by the CARES Act.
• Consumer discretionary retail, on the other hand, will be severely impacted: retailers such as restaurants, wellness/fitness centers or those located on urban high streets are seeing significantly reduced demand due to mandated closures and drastically reduced foot traffic. Some restaurants with robust delivery and takeout services will be able to maintain moderate levels of business.
• Dense retail contained within regional malls, shopping centers, and food halls will feel more acute pain, as consumers remain at home and continue to avoid large gatherings of people.
• Ultimately, asset owners and tenants will have to work collaboratively to find a path forward outside of the CARES Act. Local tenants are expected to need and receive more leeway than national tenants, who generally have longer term business plans and more cash. Relief sought by tenants from asset owners will vary but so far often includes the following:

1. Short-term rent relief: 30 to 90 days
2. Renegotiation of agreements to percentage rents with significant concessions
3. Free rent, especially if their space is currently being built
4. Long-term reduction in price/rent