Commercial Tenant Payment Performance and the Link Between Economic Recovery
Commercial tenant payment performance is typically a mirror of the economy and strongly influenced by economic growth as measured by GDP. Tenant payment performance levels tend to be higher when there is economic growth and lower when the economy is struggling.
This tendency was particularly evident in 2020. Although commercial tenant payment performance continued its recovery trend in the fourth quarter of 2020, it is a long way off from being fully recovered.
In the second quarter of 2020 – at the height of the lockdown – only 50.36% of commercial tenants were in good standing with their landlords, according to TPN’s Quarter 4 Commercial Rental Monitor. This figure recovered to 56.19% in the third quarter and to 61.2% in the last quarter of 2020, indicating a gradual recovery in tenant payment performance as lockdown restrictions were eased. Tenants in good standing are those who have settled their balance in full, including for additional charges such as parking, utilities, municipal costs and arrears.
However, although commercial tenant rental payment performance has shown signs of recovery, of concern is the fact that the rate of recovery is slowing down and continues to remain well below pre-Covid-19 levels of 77.85% which were recorded in the first quarter of 2020 and significantly below the high of 83.56% achieved in 2012.
The commercial property sector consists of three major sub-sectors: retail, industrial and office. Not surprisingly the retail property sub-sector’s tenants were initially the most severely impacted by the hard lockdown period. However, retail made the best recovery of all the commercial property sectors by the fourth quarter, recovering from a low of 45% in good standing in the second quarter to 61% in good standing by the end of the year with lower vacancies cushioning the higher delinquencies.
The industrial property sub-sector saw tenant rental payment performance improving from 54% in the second quarter to 65% by the fourth quarter, according to Commercial Rental Monitor. This sub-sector is heavily impacted by the manufacturing sector. Indications are that a further recovery in this area will be hard to achieve given that the Manufacturing Purchase Managers Index New Sales Orders for the first quarter of 2021 shows only a mediocre performance. Exacerbating the challenges facing this sub-sector are power supply disruptions. Although power disruptions impact all tenant sectors, they impact industrial tenants the most.
TPN’s data indicates that the office sub-sector was the best performing category in 2020 with 61% in good standing in the second quarter, recovering to 71% by the fourth quarter. However, this is the sub-sector likely to face the most significant challenges going forward given the higher vacancies as many businesses opt to keep their employees working from home. According to both MSCI and SAPOA the office sub-sector recorded 13.3% vacancies by the end of 2020. Compounding the higher vacancy rate in the office sub-sector are higher delinquencies as businesses continue to feel the aftershocks of the hard lockdown.
Outperforming all three major commercial property sectors was the storage sub-sector which recorded only a moderate dip of 78% of tenants in good standing in the second quarter of 2020. However, by October this figure had recovered to 90%.
What is very apparent is that the lockdown represented a significant knock to many businesses, in the process negatively impacting tenant payment performance. The slowdown in the pace of recovery in tenant payment indicates that the pace of economic recovery is slowing with the partial recovery in the economy mirroring the muted recovery in tenant payment performance. This partial recovery is similarly reflected in the improved but still very weak business confidence. A number of leading business cycle indicators, including the RMB-BER Business Confidence Index, have also begun to point to a slowdown in the pace of the post-hard lockdown recovery.
This slowdown in recovery should not be surprising considering that even before Covid-19 many businesses were either struggling or shut their doors. The pandemic exacerbated their existing challenges. It is looking increasingly likely that it will take several years for the country’s economy to recover to pre-Covid levels.