The coronavirus pandemic continues to evolve on a daily basis, and uncertainty remains on when states will lift their shelter-in-place orders and the economy will reopen. To get a big-picture view of the pandemic’s effects on the multifamily industry, MFE looked to several leading industry owners and property management firms in early April. Here, they share their top short-term and long-term concerns regarding capital, production, investment, and renters, as well as a glimpse into how their firms are responding to the crisis.
The participants include:
- Robert Hart, president and CEO, TruAmerica
- John Isakson, CFO, Preferred Apartment Communities
- A. David Lynd, CEO, LYND
- Milton Pratt, executive vice president of development, The Michaels Organization
- David Schwartz, CEO and chairman, Waterton
- Marcie Williams, president, RKW Residential
MFE: What has been the coronavirus’ effect on multifamily housing and its finance markets, and how are investors and lenders responding so far?
Hart: The biggest effect of the current coronavirus disruption is around the uncertainty of the impact of the accelerating job losses and the ability for residents to pay their rent. The short-term impact is the existing sales transaction market has all but dried up with small exceptions for deals that were in contract with large hard money deposits and private buyers needing to fulfill tax exchanges. The majority of sellers have pulled their listings off the market and will consider remarketing at a later date. Until there are more data points on property collections, it is difficult to project values until investors know how to price and underwrite the rent roll of properties. Many investors will sit on the sidelines until they get conviction around this event being a short-term disruption with a V-shaped recovery later this year or a longer-term deep recession that has a the potential to do more permanent damage with no end in sight.
The silver lining is multifamily is one of the few property types that has somewhat functional capital markets with a majority of the financing liquidity being provided by the agencies like Freddie Mac, Fannie Mae, and the Department of Housing and Urban Development. However, due to the uncertainty of future rent projections, new household formation, and occupancies because of the coronavirus pandemic, which has resulted in recent high unemployment and job losses, the agencies and most banks are quoting higher spreads, using index floors, and requiring mortgage payment escrow reserves for up to 12 months depending on the type of loan being requested. These new tighter standards for lending may result in lower proceeds and greater equity requirements, putting additional downward pressure on values.
There needs to be more time for the pandemic to settle down, right now only the most aggressive buyers and sellers in need of moving product are transacting. Investors that are transacting expect an appropriate repricing due to the risk premium looking for discounts in the range of 5% to 15%.
Isakson: Lots of speculation so far, but no one really knows what the impact will be or has been as all this has happened so fast. The last two weeks have had an impact for sure, but the degree of the losses and the length of the difficulty are impossible to say at this point. I would expect April collections to be an indicator of the health of the market, but May will be much more telling. Economic stimulus will be in the market by then, and how the multifamily sector holds up once that hits will be indicative of how resilient we can expect it to be through this.
Lynd: LYND was fortunate to have closed on a $150 million apartment portfolio in Texas around the same time the coronavirus was becoming a crisis in the U.S. Currently, we have another $400 million under contract, but most of the equity groups have hit the pause button until they can evaluate how the virus will impact the job market long term. Jobs equal renters—it’s that simple. As far as lenders go, the ones we are talking to are open for business, but a lot of the debt instruments like balance-sheet loans have been put on hold for the time being.
Pratt: Most of the impact is on cash flow, as rent payments are being impacted by residents losing their jobs, etc. Other impacts are being felt on construction sites in states where construction has been ordered to stop; we continue to close deals, but there has been confusion in the bond markets and among state agencies that is slowing the process and delaying some closes.
We are working on contingency plans for those projects, including in-place rehabs that are being delayed because of the current situation.
Because of our strong financial position and our reputation as an industry leader, we are speaking with our partners, lenders, and investors, and examining the provisions of the CARES Act to work out best ways to proceed on our development deals for both the short and long term.
The supply chain for some construction projects has also been disrupted.
Schwartz: Demand is down drastically, renewals and retention are up, rent growth is flat to negative depending on the market, traffic is down, any leasing is done online, most investors are pencils down, transaction volume is down dramatically, development in progress likely continues to get funded (unless it was already on the margin), new development has little appetite from equity investors, institutional investors are sidelined, cap rates are likely up, and NOIs are down so values are taking a duel hit. Agency lenders are still active, but spreads are up and underwriting is factoring in reality, banks will still lend, but on a relationship basis, no other real lending out there … debt funds are gone, CMBS is gone, and insurance companies are more or less out of the market.
MFE: How do you think multifamily production will be impacted?
Hart: New multifamily production has come to a complete halt. Most states and local jurisdictions have halted construction activities with the current stay-at-home orders. In locations where construction is allowed, the local government offices are closed and unable to provide permits and allow inspectors to check on sites thus causing a shutdown for almost all existing projects. The combination of lack of new construction financing availability and investors sitting on the sidelines expecting repricing of opportunities will prevent a return to normal when the economy reopens and people go back to work. This halt in production will probably exist for the foreseeable future, contributing to the existing housing shortage in the U.S.
Isakson: In-place deals will get completed, albeit with delays. I expect lease-ups to be hampered but ultimately be fine. I think there will be a six- to nine-month pause on new construction deals as banks, investors, and developers navigate the pandemic and its fallout.
Lynd: Every aspect of our industry will be affected, and we’re going to have to wait and see when or if things will return to normal. I suspect we’ll be dealing with a “new” normal, but I don’t quite know what that looks like at this point.
Pratt: Depending on how long the economy remains virtually shut down, and how many people end up losing their jobs, some previously hot markets for market-rate and student housing may suddenly seem overbuilt. On the affordable side of our business, we expect demand to actually increase.
Schwartz: The supply pipeline in progress gets produced, but maybe slowed due to different states’ essential-worker rules with respect to construction. New development going forward will shut down. There is very little interest from the equity markets until there is much more visibility on demand and the absorption of the existing newer construction.
MFE: What is the biggest threat to the industry?
Hart: Permanent job loss and reduction of tourism and travel within the U.S. and from foreign travelers as well. The airlines need to get back in the air safely, global tourism and travel needs to resume, and hotels, restaurants, and entertainment venues need to return to normal operations to restore a rhythm of normalcy to daily life.
Isakson: Extended unemployment and a prolonged economic shutdown.
Lynd: The single biggest threat, in my opinion, is how small- and medium-sized businesses ultimately rebound from the crisis. Together, they represent 40% of all employment in the U.S. so if these companies don’t reopen and rehire their employees, our country could be headed for a deep recession. The federal government should create a stimulus plan just to ensure small- and medium-sized companies have the capital to reboot when the virus comes to an end.
Pratt: Capital! I believe the banks will retreat from the market-rate multifamily sector and stall many deals in 2021/2022 until the market normalizes. We hope this will create some affordable opportunities for us on land and building in late 2020 and into 2021.
Schwartz: Our residents’ ability to pay rent due to massive unemployment. This should be partially mitigated in the near term with the CARES Act. April and May will be telling as far as collections. Furthermore there is progressive activism calling for broad rent strikes. Our industry needs to be vigilant in educating policy makers how harmful and irresponsible it is to call for this type of policy. Apartment homes/shelter are essential in this crisis like food and health care.
Williams: Unemployment is undoubtedly the biggest threat to our industry. The sudden loss of 17 million jobs over a three-week period could have a lasting impact, depending on how much additional time passes before the crisis eases. Although emergency programs have been put in place to help small businesses retain as many employees as possible, many businesses may struggle to get all the way back to pre-crisis levels of operation. Employment drives the multifamily sector, and dramatic declines in employment can cause rental rates, rent payments, and occupancy to suffer.
MFE: What is your biggest concern right now? What are your top concerns for the long term?
Hart: My biggest concern is the health and welfare of our employees and residents. In the long term, we need to restore the confidence of consumers so that they feel safe assembling in public, traveling, and going to restaurants, sporting events, and entertainment venues.
Isakson: That the lockdowns extend three months and the economy truly rolls into a depression and we have major unemployment/occupancy issues. I don’t think the pandemic is going to create any long-term issues in our sector.
Lynd: My biggest concern is: When will employees be able to return to work, and how many jobs will there be to return to? The longer people are out of work, the longer it means they cannot pay their bills. If the trend drags on, then on a larger scale we’ll start seeing a rash of debt defaults in the multifamily industry. I’m really trying to be optimistic that we don’t get to that point, but you have to be realistic at the same time.
Pratt: Our main focus is, and always will be, on the health and welfare of our 2,000 teammates and their families.
We are keeping our business running, while implementing as many procedures as possible to minimize the risk of exposure while maintaining social distancing. To that end:
- We have closed all community spaces at our apartment communities, including playgrounds and community gardens.
- We have stopped all community events and activities at our sites, with the exception of food deliveries or (other critical personal services such as caregiving visits).
Our senior sites are no longer able to accept visitors, per city and state guidance.
- We have notified our residents that only essential life-safety maintenance will be performed in their units during this time.
- We are tracking all service requests for occupied units, so that non-safety maintenance can be addressed as soon as operations return to normal.
- Community offices are closed to the public and are seeing residents by appointments only.
- We are encouraging all residents to use the online portal to pay their rents.
- All unit inspections are on hold.
- We have restricted all business travel; and have stopped all plans for ground breakings, grand openings, and other types of events.
- We have implemented remote work procedures for our regional offices as well as for the Camden, N.J., headquarters building.
- Our vice president of human resources, in collaboration with the senior leadership, has been crafting critical procedure instructions so that all of us know what to do during different scenarios in this unprecedented time.
- We are making five days of additional sick time available for anyone who may get sick from the virus.
- If a teammate’s job cannot be done remotely, and they are directed by management to self-quarantine because of a coworker’s virus status, we are continuing to pay those teammates for the time they are in self-quarantine.
- In accordance with government guidance, we are stopping all evictions for non-rent payment and waiving all late fees on rent payments; we are working with our residents on a one-on-one basis to set up payment plans.
Schwartz: A mid- to long-term demand problem. Let’s hope for a strong V-shape recovery. A U- or L-shape recovery will not be good for multifamily, particularly Class A. The type of recovery we will have depends on medical science and when the economy can open up in full.
Williams: The health and well-being of our on-site associates is the top priority and biggest concern. We have worked with our vendor partners to secure additional personal protective equipment so they can continue to serve our residents and maintain and sanitize the buildings. Last month, we introduced the Teladoc program with Blue Cross Blue Shield and an Employee Assistance Program to help associates holistically. We will continue to focus on the immediate needs of associates, residents, and clients with the knowledge that we will adapt to the constantly evolving situation.
MFE: What steps can developers/owners take at this time to keep projects moving forward or otherwise help their businesses?
Hart: Make best efforts to work remotely where possible. On-site, keep essential crews working and instituting maximum safety measures for wearing masks, staying six feet apart and utilizing hand-washing stations.
It is always good practice for project managers to communicate in advance with the site management to ensure residents understand the impact of and upcoming renovation projects and how the construction will affect them for the duration. During this fluid COVID-19 time, project managers have to overcommunicate in advance and outline all the measures taken to ensure safe working conditions in accordance with all federal and state regulations.
Pre-construction meetings with the site staff and contractors should include COVID-19 protocols in addition to the regular pre-construction check list.
While there are new limitations to construction projects at this time, project managers should leverage the ability to progress plan check of new projects. Many jurisdictions have their plan check staff working remotely and provide electronic submittals and payments online.
Minimize the execution of interior projects that place the workers in close proximity to tenants. Focus on exterior work, but be mindful that unlike before, most of the residents are at the property during the day time as well. For example, paving projects should not be done now as the properties’ parking lots are full and active all day long, but exterior lighting retrofits or a signage project should not negatively impact the residents.
This is the time to think out of the box on how to move as many projects forward utilizing your project managers, contractor base, communication and cloud-based technology, and business creativity.
Isakson: Protect cash, place value on employees and workers/vendors. When this ends, and hopefully it ends quickly, people will remember those who were helpful versus those who tried to take advantage.
Lynd: Continue to canvas the markets and see who is still active and make sure you have flexible contracts that give some cushion for this downturn to work itself out.
Pratt: We are working with various local, state, and national industry groups to encourage political officials to exempt affordable housing/student housing construction as essential projects from the construction stop orders.
We are arranging for third-party reports, such as physical needs assessments, appraisals, and other required on-site inspections to get completed immediately after the shutdown orders are lifted. We are talking with these vendors to ensure that we have a place in their pipeline as they will be very busy once things get back to normal.
Developers should overcommunicate with all their partners during the shutdown to ensure that they know that they are open for business immediately after we can return to work.
Schwartz: Cash is king. Make sure your balance sheet is in order. I’d put all value-add projects not in progress on hold. I’d not jump into transactions until there is more visibility on values. Communicate with your investors, and be realistic and perhaps overly conservative. They won’t complain if things are better than you told them. If you can unwind projects that likely will be underwater from a valuation standpoint, better to walk away. As we come out the other side of this downturn, be prepared to take advantage of the opportunities.
MFE: Have you learned any key lessons so far during the pandemic?
Hart: Yes, you must have a contingency plan for anything and everything. It’s critical that your teams know how to work remotely and be efficient and productive working together just as if they were working at their offices. There is no substitute for good advanced planning. Above all, create a diversified portfolio of assets that is ironclad that can withstand unexpected downturns and don’t over-leverage.
Isakson: You can never be too prepared ...
Lynd: Just like in any crisis, you need to overcommunicate to your lenders, partners, clients, and residents. People are always looking for leadership in a company, but now more than ever. You can either control the narrative or leave it to someone else. It’s up to you.
Pratt: Businesses need to remain flexible and nimble at all times to be able to respond to unprecedented situations. The biggest asset to our business is our people, and we must at all times have their safety and health as our top concerns. Our financial strength and our always-conservative approach to our bottom line and our reputation as a trusted partner and industry leader is a big plus for The Michaels Organization at this time. We have strong relationships, a strong balance sheet, and believe we are nimble enough to weather this unprecedented challenge.
Williams: We are still in the midst of a crisis that continues to evolve, so there has not been an opportunity to reflect much on long-term takeaways. As the crisis diminishes, we will learn more and have a better sense of the key lessons. One thing is certain: The multifamily industry—along with many others—will have a new way of doing business after we overcome this challenge.
