Why pick residential rentals over commercial in OKC

[Rhett Tullis]

I like many folks on here have dreamed of owning commercial real estate (retail, office and the like) I currently do own a small office building and multiple rentals as well as managing over 1100 door in OKC metro.  We like most are being flooded with calls of folks not able to pay their rent.  While there are many things we can discuss on this one thing I am seeing over and over is the wide gap between number of calls/emails from commercial tenants as opposed to residential.  While when this is all said and done it may be different here are a few thoughts I have.

Commercial 

-many businesses are shut down currently and have no source of income at this point.

-legally some of them could not open even if they wanted to per the State of Oklahoma.

-many of them are staying home and/or working from home (we will need to see how this changes office leasing in the long term if at all)

-most are asking for help with their rent (over 50% i would say so far of the small group I manage).  While the most recent government program seems to focus on helping them meet payroll I am still trying to see how/if it will offer them help with their rent payments.  Most of the programs seem to focus on families and payroll.

-I have not seen anything on help for commercial property owners on their loans, insurance or property taxes all of which are still due.  There may be hope to work things out directly with ones bank but it will take more time and energy that if the government mandates options.

-many businesses will not ever recover from this,  we are already seeing some close down or significantly downsize.  While this is expected in a normal time it is even more of an issue today.  While in a normal situation we would say "just get it listed and find another tenant" I fear this pandemic may have long lasting effects on small and medium size businesses and their likelihood of starting another one which will translate into more and longer commercial vacancies.

Residential -

-we all need a place to live and when the "rubber hits the road" we will choose to pay our rent/house payment before we worry about our place of business.

-many tenants receive government assistance for their housing that will not change during this period as far as I can see so far.  This may be things like section 8 or even tenants that live on social security checks that will not change at this point.  

-while a large group of residential tenants are asking for help with rent that is due (this is a bit disturbing in that we have not even passed a pay period for many tenants which shows that many do not have an emergency fund in place) I am getting much fewer requests like this compared to the percentage of commercial tenants asking for help (i would estimate around 6% of our residential tenants so far although I am sure more will contact us soon)

-many owners of residential rentals have conventional loans which in my opinion will have a greater chance at qualifying (greater than a commercial loan) for the government programs that I hope will roll out soon.  

-as stated above we all need a place to live.  Folks need a home and even if they are evicted they will need another home soon.  The demand will remain the same for residential rentals as our population is not changing and if anything is growing in spite of the struggles we are now facing.

I still think commercial real estate can be a great investment in OKC but I think many folks get into it and are either over leveraged or have their numbers adjusted to work in a "normal" situation which we all know does not exist in our present setting.

Again as always this is only my opinion and my views from seeing my small corner of the world here in OKC.  I am sure things are different in other parts of the world but some items here I think will apply the world over in some manner or other.

[John Kunick]

@Rhett Tullis, thanks for this thread.  Full disclosure: I own several residential rentals in Tulsa and multi-family in Dallas.  I DO NOT own any commercial even though I've had many opportunities to buy them.  I've always subscribed to "they will always need a place to live no matter what happens to the economy" theory and therefore just never could pull the trigger on commercial.

Having said that, several of my friends and I have been talking about what life will be like in six months after the COVID panic is over.  By far, the #1 trend we see is "work from home" will become much more normal.  This has serious implications for certain segments of commercial.

The other key aspect that this pandemic has brought to light is the over-leveraging of assets.  Hopefully, many will learn that you must have a manageable debt to equity ratio and also have adequate cash reserves to weather storms..