It’s obvious that certain commercial sectors are suffering more during the COVID-19 pandemic. Restaurants, retailers and hotels have been hit especially hard. But what about the multifamily market?
That was the question that a panel of apartment and lending experts tackled during the latest episode in REjournals’ Breaking Through the Disruption webinar series, the Michigan Multifamily State of the Market held May 6.
Multifamily pros Scott Nurski, senior multifamily investment specialist with NAI Wisinski of West Michigan; Aaron Metaj, senior vice president with Northwind Financial; David Dismondy, managing director with District Capital; Kevin Jahnke, multifamily specialist with Income Property Organization; and Bobby Nicolls, asset manager with Monarch Investment and Management Group shared their thoughts on everything from rent collections and the country’s slow but steady economic reopening to what the future might hold for multifamily.
And the overall consensus? There’s reason for hope in multifamily, even during these challenging days.
If you want to see the entire Webinar, and others in our Breaking Through the Disruption series, visit our YouTube page. And be sure to sign up for our upcoming webinar, Honoring the Top National Women in Real Estate.
Metaj got the message of hope rolling early. He said that Northwind Financial is fortunate: The lender is liquid right now and has not changed its lending guidelines in response to the pandemic.
Even better? Northwind remains busy.
“I am in the office. Sorry, but that’s the way it goes,” Metaj said. “We are calling on existing customers. We are working on PPP loans, helping clients fill out applications. Their ability to obtain loans is vital to them. We have people whose role is to work with our customers all week long.”
And for the future? Metaj said that June will be the tell-tale month for apartment owners and the commercial real estate market. If the majority of tenants continue to pay their rent in June and the nation’s economy slowly reopens, that will be the key to determining how quickly the industry gets out of the COVID-19-inspired slowdown, Metaj said.
Dismody said that District Capital is spending much of its time now reminding clients that there is good debt available for the multifamily sector. While plenty of commercial sectors have been hit hard by the pandemic and the resulting economic shutdown, the multifamily sector remains healthier than most, he said.
This doesn’t mean that apartment owners and managers aren’t facing challenges. But it does mean that there is plenty of reason to believe that multifamily will remain a strong asset class once COVID-19 is contained enough for the country’s economy to reopen.
“It is not gloom-and-doom in that sector,” Dismody said. “Debt is available.”
Nicolls said that Monarch is working hard to take care of their tenants. This includes setting up payment plans for those tenants who are struggling financially because of the virus. The key, Nicolls said, is communication: Monarch is making every effort to communicate with its tenants about what they need and how the company can best serve them.
Nurski said that he and his fellow brokers with NAI Wisinski have shifted their approach to the business. They are spending much of their time today reaching out to their existing clients. Trying to land new business? That’s still important, but it’s not as much of a focus today.
“We have been at this for about eight weeks now. I have been really focusing during this time on trying to listen to my clients more so than on selling,” Nurski said. “I’m trying to understand the problems each of them are facing, the challenges they are trying to overcome. I’m just trying to help them, whether through providing timely advice, sharing insights or sharing information through email.”
Jahnke agreed that this approach is key. He said that his company, too, is continually reaching out to clients to determine what they most need during these challenging times.
“It’s about letting them know that we are here and we are here for them,” Jahnke said.
While a larger percentage of apartment tenants didn’t pay their rents in April, a surprisingly high percentage of them did make these payments on time. That led to the obvious question: What will happen in May and June?
Will tenants start missing rent payments in greater numbers?
Metaj said that May and June will be key months. Many states are reopening their economies and letting businesses open their doors again, though at 50 percent or less capacities. Metaj said he wondered if businesses, though, would hoard cash or would they start rehiring? If they don’t rehire in sufficient numbers, will that trickle down to an increased number of missed rent payments in May and June?
“I do agree that communication with renters is the key right now,” Metaj said. “Owners might have to allow partial payments from some renters or set up payment plans. I’d say, though, that if you had success in collecting rent payments in April and May, I think you’ll be home free.”
Nicolls said that rent collections at Monarch’s properties have been surprisingly strong so far. He said that he expects collections to remain strong in May.
His concern? Occupancy levels, not delinquencies.
“Will we see more renters moving back home with their parents? What will they do once their increased unemployment benefits run out?” Nicolls asked.
Nicolls said that he doesn’t expect the multifamily market to suffer too much in the Midwest and in Michigan. But he does wonder about bigger losses on the coasts and in higher-priced markets.
Renters in costlier markets, including some in the Midwest such as Chicago and Minneapolis, might struggle more to pay their apartment rents on time, Nicolls said. If someone making $100,000 a year loses a job and is now making just $52,000 a year, that person is going to struggle to make rent on time.
“The renters in the upper middle class are probably the most frustrated,” Nicolls said. “If they have been laid off, they really are getting the short end of the stick.”
Nicolls also said that Monarch hasn’t faced much pressure to forgive tenants’ rents. He did point to one property in Colorado in which a resident tried to organize a rent strike. A total of 14 tenants in the 250-unit-or-so property supported the idea, signing up to a Facebook group devoted to the possibility.
The result? Nicolls said that 13 of the 14 renters paid their April rent on time. The one person who didn’t was the renter who started the movement.
Webinar participants were also asked about deal flow and refinancing activity in the multifamily market. Fortunately, the lenders on the webinar said that they are still able to justify providing financing in the multifamily space.
“The short answer is ‘no,’” Dismody answered when asked whether beleaguered income statements from multifamily operators and owners might keep companies from lending in the multifamily space.
The real test, he said, is what happens after the state’s economy opens and people return to work.
“How many people will remain unemployed after the virus is no longer deemed a threat?” Dismody asked. “If unemployment is high, that is when it will start impacting ROIs and occupancies.”
Jahnke said that he saw a little dip in deal flow at the beginning of the pandemic. At that time, with so much uncertainty, plenty of lenders turned off the faucet for a couple of weeks, Jahnke said.
Fortunately, Jahnke said, that shutdown lasted for only a brief period, and lending is still happening now in the multifamily sector.
Still, there remain plenty of unanswered questions about what will happen when states reopen their economies. Until those questions are answered, there’ll be uncertainty surrounding deal flow, even in the steadier multifamily sector, Jahnke said.
“What will happen in June, July and August when savings accounts are depleted and the checks stop coming in?” Jahnke asked. “What will happen when people get back to work? A lot of these workforce-housing tenants make more on unemployment than they do on their actual jobs.”
When asked about the general mood in the Michigan and national multifamily markets, webinar participants all expressed cautious optimism.
Nurski pointed out that multifamily was a favored asset class before the pandemic hit. He said he doesn’t expect that to change either during or after the crisis. He said that some renters who might have been thinking about buying a home might be postponing that decision for now. They will continue renting instead of buying, which will help the multifamily market.
“We can all speculate on the worst-case scenarios,” Nurski said. “At the same time, we have seen evidence that good tenants are going to try to maintain their credit as much as they can and maintain a strong standing with their landlords. We all need a place to live. The average person values a safe and stable home environment.”
Jahnke agreed that multifamily should come out the other side of the pandemic in good shape.
“Multifamily is strong. It’s not going anywhere,” he said. “We are so underserved for housing in this country. If we lose some tenants right now, we will pick others up. Long-term, multifamily is still a safe play.”
Multifamily remains attractive to investors, Jahnke said. He compared owning an apartment property to owning a retail strip center. If one tenant leaves in an apartment, owners have plenty of other tenants still paying their rent. If one tenant leaves a strip center, that owner might take a huge financial hit.
“I hate to use the word ‘safe,’ but multifamily is a safer investment than many other commercial sectors,” Jahnke said.
Dismody said that multifamily was the one asset class in which District Capital hasn’t been actively modifying loans or completing workouts.
“Multifamily owners aren’t having the problems that retail or hospitality owners are having,” Dismody said. “We are not seeing any distressed assets in multifamily yet. Borrowers are reaching out to us asking for opportunities. People are looking for opportunities.”
Metaj said that there are already signs of the economy reopening across the country. Investors are looking for opportunities, especially the savvier ones, he said.
“We are going to get through this,” Metaj said. “It’s just a matter of when. We had such a strong economy going into this. We are seeing a lot of good opportunities out there. Multifamily is the asset class that everyone is talking about right now. It has certainly been our flight to quality and our flight to safety.”