To say that dark clouds were forming in the markets prior to March when the economy shut down in response to the Covid-19 pandemic is a gross understatement. In fact, the NBER (National Bureau of Economic Research), an organization that reports when we are in recession, stated in a June 8, 2020 report that the US Economy was already in recession in February 2020 - a full month before we shut down.

The fiscal and governmental policy response to the recession and pandemic was a massive stimulus program to help individuals, small businesses and American corporations to weather the storm. Many of the individuals laid off now make more thanks to a $600 per week government stimulus bonus in addition to their unemployment checks while small businesses received government grants in the form of the Paycheck Protection Program (PPP) under the CARES Act and the SBA Economic Injury Disaster Loan (EIDL). These programs have provided support for individuals and businesses to survive temporarily but they cannot go on permanently and despite their relative short-term success, many businesses around the country are still shut down and bankruptcies are rising rapidly in the corporate world. Many businesses will never re-open.

How does this impact commercial properties? In many areas, local and state governments have enacted measures to prevent Landlords from evicting non-paying tenants. In the State of Nevada for instance, commercial Landlord’s could not evict a non-paying tenant, even if they were open for business, until July 1, 2020. Owners of multi-family properties can’t commence eviction in Nevada until September 1, 2020. While this is a great benefit to tenants and helps keep the economy slightly more stable, when Landlords start approaching tenants about renegotiating non-performing leases, we will likely see a flood of vacancy and those landlords that weren’t sufficiently capitalized to weather a longer storm will face pressures from their lenders.

"Over the next two years, the market could expect to see 13,000 loans totaling $148 billion held in commercial mortgage-backed securities default, according to a new analysis by CoStar Risk Analytics." - CoStar

Trepp, a data firm that tracks commercial mortgage backed securities (CMBS), reported on June 12, 2020, that the delinquency rate for CMBS debt recorded the largest increase since 2009 when the US was in middle of the Great Recession. That’s just the tip of the iceberg. Some commercial real estate firms have been waiting for this opportunity and have sufficient reserves to ride the wave and take advantage of buying opportunities but others, and especially individual investors, rely too heavily on the cash flows of their assets and will not have the reserves to stave off foreclosure.

What has been our response to the Crisis?

When the pandemic hit, Fortress Equities, LLC immediately began reinforcing reserves on all its assets to further protect investors. While our hundred or so high net worth and Accredited Investors have seen a drop in cash flow, our priority was and is to protect investments from distress. Already lightly leveraged at less than 34% on our entire portfolio, we not only have sufficient reserves to “ride this out” for many more months but we also face little pressure from our lenders should vacancies rise, which we expect they will. Proactively, we contacted all our tenants and offered to immediately work with them. By temporarily reducing rents, we agreed to a repayment program on unpaid rents for 90% of our tenants. This alleviate pressures on the tenant while increasing the probability that they will survive and be able to repay deferred rent payments.

Most importantly, we have been preparing for the coming deluge of defaulted property at a discount. The Fortress Equities Real Estate Value Fund, LLC, a 506 (c) offering raising $50,000,000 for the sole purpose of acquiring distressed opportunities in commercial real estate launches in August 2020. With a geographical focus of the western United States including CA, NV, AZ, OR and WA, we expect to add significantly to our existing portfolio within that region.

For more information about the Fortress Equities Real Estate Value Fund, click here. For immediate questions, please contact our Las Vegas based team at 702-850-6000.