Federal and State governments in the United States have unintentionally created a valuation premium for “essential businesses” over “non-essential businesses” by providing them with more leasing options, better lease terms, more customer availability, and better access to capital than what’s available to “non-essential” businesses?
The terms “essential business” and “non-essential business” are new phenomenon in the last couple of months. And these labels have bifurcated businesses into winners and losers, haves and have nots. Commercial landlords will now be more thoughtful about who they lease their buildings to and the industries in which their tenants operate. Landlords will desire tenants operating in “essential” industries over those operating in “non-essential” industries, hedging the risk of future pandemic shutdowns. The result, buildings with essential business tenants are now more valuable than buildings with non-essential business tenants in the eyes of buyers or investors.
The same dichotomy is true from a lender’s perspective. A lender will be more inclined to lend to a business that has been deemed essential over a business deemed non-essential. A lender’s motivation is to realize a return while decreasing default risk. A business immune from shutdown by Federal and State governments surely has less default risk than one that can be forced to cease production. Similarly, lenders will prefer to extend mortgages to owners of commercial properties with essential tenants over those with non-essential tenants due to differing risks.
What about when businesses review their supply chains post-pandemic? Board rooms will certainly be talking about the need to reduce disruption should another pandemic occur. Relationships with suppliers producing essential goods and services will be deemed more valuable than those that risk a future shutdown.
If the buildings in which essential businesses operate are now more valuable than those occupied by non-essential business, and if essential businesses now have better access to capital than non-essential businesses, and if customers prefer to be supplied by essential businesses over non-essential businesses, haven’t we just made essential businesses more valuable than non-essential businesses? The industry risk premiums have changed. There are new winners and losers.