For Ethan Conrad, adjusting to last year involved a lot of tenant talks
Mar 26, 2021, 6:57am PDT
SACRAMENTO BUSINESS JOURNAL
For a decade, real estate investor Ethan Conrad had a playbook: buy low, improve the property, borrow against the improved value, repeat.
When Covid-19 hit in March 2020, though, there was suddenly a new dilemma. Many of Conrad’s properties were either retail or office, meaning some tenants suddenly had little to no income, and others weren’t in their space at all.
“Some of our lenders were freaking out,” said Conrad, who made his name in the last economic downturn by acquiring dozens of properties at a discount, first in the Sacramento region and then throughout the Central Valley. “A lot of our tenants freaked out.”
Conrad, though, said he didn’t freak out. The biggest fear, he said, was the unknown, as reflected in the eventual reality that while the pandemic’s effects weren’t as bad as feared, the pandemic itself lasted longer than anyone expected.
To get through it, Conrad said, he used a simple philosophy of just working harder to overcome it. But that also meant a lot of conversations with many of his 1,400 tenants, each with a unique situation. He said we were concerned many of them wouldn’t be viable anymore.
“I will say the super-proactive tenants take advantage of government funds,” he said, referring to the Paycheck Protection Program and programs like it enacted soon after the pandemic began to help businesses survive. “It was crazy to me that business owners didn’t take advantage of it. It’s free nontaxable money.”
Conrad said he and other property managers with Ethan Conrad Properties Inc. would ask business owners seeking rent relief if they’d applied for such programs. If they had, it made it easier to discuss deferring some rent or extending lease terms, he said. About 200 tenants are deferring rent, with most of those structured like balloon payments down the road, though they’re also rewriting those deals, he said.
“My thought process is that I like doing favors for tenants, especially if it’s mutually beneficent,” he said.
The company kept most of the tenants in its portfolio, with most of the departures by national retailers that filed for bankruptcy, Conrad said. In a couple cases, he said, he had to take a tougher position with tenants who simply didn’t honor an existing lease and also didn’t communicate.
As vaccination campaigns against Covid-19 ramp up and the number of new infections drops, Conrad said, he’s hopeful spring 2021 will be the opposite of spring 2020, with more businesses opening and seeing good traffic when they do.
For tenants such as restaurants and salons that had restrictions on how they operated, particularly indoors, the company made them a deal, he said: free rent until they could reopen. Sacramento and Placer counties received clearance for those kinds of businesses to operate indoors with modifications earlier this month.
“I’m using that as a tool to have people still sign leases,” Conrad said. A tenant who sells bridal supplies was hesitant to renew when the lease came up on Feb. 1, he said. To keep them, he said he wouldn’t charge rent until pandemic conditions improve enough for larger weddings to become common again.
Most of the impact Conrad’s company saw was with retail tenants, as most office tenants continued to honor their leases.
Conrad said he believes his overall acquisition strategy still makes sense, but he’s thinking more about where the demand will be in the future. Suburban offices, which the majority of his office portfolio is, will probably hold up better in the next few years than Downtown Sacramento offices, he said.
In the long run, Conrad said he’s not as concerned with many of his soft-good retailers because he believes shoppers want to see, pick up and touch what they’re buying. Online shopping is better suited to buying what you’ve bought before, he said.
For his own kind of property shopping, Conrad said, he’s surprised he hasn’t seen more “deals” prompted by Covid-19.
“It takes awhile, but a bunch of people were expecting more distressed assets,” he said.
If he had to go back to when the pandemic started, Conrad said, he’s not sure what he would’ve done differently, other than maybe staff up on people working in accounts receivable to account for the added time spent working with tenants.
“There’s time involved with trying to be in tune with tenants who are going through different situations and solutions that work for each tenant,” he said. “Just figuring it out.”
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The Essentials: Ethan Conrad, founder and CEO of Ethan Conrad Properties Inc.
Headquarters: Sacramento
Year founded: 2000
Primary line of business: Investment in commercial properties, mostly retail and office, with an emphasis on improving them and boosting their occupancy.
Square footage managed: About 6.28 million square feet
Philosophy: Buy properties at low values, increase value, finance on improved value, use proceeds to acquire more properties. “I bought properties below replacement cost with value-added. That’s what I like to do. I like the process better.”
