The Paycheck Protection Program, a $350 billion government effort to help small and medium-size businesses weather the coronavirus pandemic, is hitting its funding limit less than two weeks after it was launched on April 3.
The exhaustion of PPP funds has been a costly lesson for some: Wait and see has turned into wait and explore other options.
“At the present run-rate, we’re going to be out of money,” Lawrence Kudlow, director of the National Economic Council, said on Tuesday. By then, there had been nearly 1.2 million applications totaling more than $268 billion approved in the program, which was part of the $2.2 trillion CARES Act. The PPP’s funds were expected to be exhausted by Thursday.
But as businesses continue to seek assistance, Washington remains in a stalemate over further expansion of the program. For those sitting on the sidelines, it has been a costly lesson: Wait and see has turned into wait and explore other options.
Now, with government assistance exhausted, real estate companies are looking to banks and the private sector for relief.
A troubled start
From the start, the Paycheck Protection Program has been challenged by borrowers unable to access willing lenders and by lenders unable to process voluminous requests. In addition, some lenders have restricted applications to borrowers with a current banking relationship, while other lenders have sat on the sidelines, unwilling to take the risk of processing loans because of vague guidance provided by the government. Several lenders couldn’t process loan requests because of problems with the computer systems of the Small Business Administration, which administers the program.
Construction firms have made up a larger share of loans approved than any other industry as the unstable environment for builders has resulted in widespread layoffs. But a broader look at the loans issued under the Paycheck Protection Program as of Monday shows how great the demand is across industries:
Relief for construction companies makes up greater than 50% of all real estate-related loans under the Paycheck Protection Program, totaling nearly $34 million. Total average loan size over the entire program as of Monday was $239,152.
The purpose of the Paycheck Protection Program, as originally funded, was to provide a lifeline to employers for about eight weeks, which was expected to be the most challenging period of the pandemic.
But the shock to the economy resulting in a swiftly ballooning unemployment rate has crippled real estate investments, which are dependent on the strong consumer and a sure-footed corporate America, and extended this period of distress. The hospitality and retail sectors will not begin to recover until social distancing measures and closures are eased, which is likely to last beyond the eight-week timetable. Human behavior will guide the recovery, and health solutions will predate any meaningful recovery.
The result is a real estate industry left searching for alternatives to government financing.
These companies are working with their lenders to strengthen balance sheets to ride out the virus. If we can glean any insight from the public markets, more than 20 filers across industries and the Americas have requested a loosening of loan covenants since March 9, according to Bloomberg. Outside of easing covenants, companies are drawing down on existing lines of credit and raising new loans to gain increased liquidity. Overall, firms have raised $285 billion in total, which includes $218 billion in drawdowns and $67 billion in new deals.
Here is a sector-by-sector look at the industry:
- Hospitality: The hospitality sector has been devastated by the overnight halt of business and leisure travel. Much like the public players in the hospitality sector, the middle market firms have been using credit and debt facilities, working with their lenders to waive covenants as well as seeking to amend existing agreements as they attempt to ride out the virus.
- Retail: Retail sector investors with portfolios containing a concentration of grocery tenants and consumer staples tenants are in a better position than those with tenant mixes weighted toward entertainment, restaurants and bars, gyms, luxury goods and apparel. Financial flexibility through liquidity is key to manage disruption to tenants’ ability to pay rent as stores stay shuttered. Many states like Ohio, Wisconsin and California are issuing orders that make it more difficult for landlords to terminate tenants that fail to pay rent, providing an additional challenge to landlords.
- Senior living: Investors in the senior living sector are particularly vulnerable as negative press around outbreaks in communities is causing family members of residents to think twice about keeping their loved ones in these homes. The sector will continue to face disruption in expected financial results related to the pandemic.
- Multifamily: Multifamily has so far caught a break. Rent payments received for April were down only 7% month over month from March collections. Rising unemployment coupled with the delay in getting assistance to residents in the form of direct payments and enhanced unemployment benefits will show up to a greater degree in the May reading.
Looking to the Main Street Lending Program
For those middle market companies that may have missed the boat on the Paycheck Protection Program, and continue to seek ways to bolster liquidity, the Main Street Lending Program may prove beneficial. The comment period for the MSLP ended April 16, and further clarity is forthcoming.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
