Multifamily, along with industrial, is one of the top-performing commercial sectors today, showing true resilience in the face of the COVID-19 pandemic. But the real challenges for this sector lie in the future: What happens to rent collections and occupancy rates when stimulus money and enhanced unemployment benefits run out?
That’s the question that five commercial real estate experts serving Michigan and Ohio tackled during the Breaking Through the Disruption webinar series held earlier this week by REjournals.
During this latest online session, The Michigan and Ohio multifamily market: Investments and operations during COVID-19, Matthew Lester, founder and chief executive officer of Princeton Enterprises; Dori Nolan, senior vice president of client services with Berkadia; Rob Zelina, senior vice president of capital markets with Lifestyle Communities; Chuck Lavezzi, chief operating officer of Monarch Investment and Management; and moderator Kevin Dillon, senior managing director with Berkadia, all took on the big questions facing multifamily during the age of COVID-19.
Dillon started the webinar by asking participants about the biggest worry that multifamily owners and managers faced when businesses started shutting down and unemployment began soaring: Will renters be able to pay their rents on time?
So far, at least, the answer to this has been mostly “yes.”
Lester said that he has been pleasantly surprised at how strong collections have been so far.
“In the middle of March, we were concerned, it not outright panicked, about what might happen to our revenue and collections,” Lester said. “Turns out, those have been strong so far.”
Lester said that in April and May, properties in Princeton Enterprises’ portfolio collected more than 95 percent of their scheduled rent payments.
“The percentage of collections might not necessarily be the most important metric, but we are obviously pleased with the fact that in April and May, we were able to collect north of 95 percent of our rents,” Lester said.
Lavezzi reported similar news. Monarch Investment and Management provides primarily workforce housing in 21 states, a portfolio that includes roughly 61,000 units. He said that in April, rent collections we at about 99.4 percent of the company’s budgeted gross amount. For May, as of the 19th of the month, Monarch had collected about 95.5 percent of its rent payments.
That’s not much different from the 19th of any given month. Lavezzi said that by the 19th, Monarch has typically collected about 96 percent of its rent payments.
Zelina reported that Lifestyle Communities, a developer and operator of Class-A multifamily properties, also had a strong April and May. The company collected 99 percent of its scheduled rents. Rental rates, though, are either flat or up just slightly during this time, Zelina said.
Lester, though, warned that just because rent collections have been high so far, this doesn’t mean that challenges don’t await for multifamily owners.
Lester said that for Princeton Enterprises, December of last year was a particularly strong month when it came to billable rent. January of this year was even better, and so was February. This meant that before the pandemic hit, 2020 was shaping up to be a year in which company revenues were going to be increasing by a significant amount.
Now, though, rental rates are flat. It doesn’t make sense, then, to rely only on rental collections to determine the health of the multifamily market, Lester said.
“If you collected 100 percent of your rents but your rents are below market rate, that’s not really a success,” Lester said. “If you collected 100 percent of your rent but your vacancy rate was at 15 or 20 percent, higher than what most of us are experiencing, you can’t call that a success.”
Lester said that it is more important to look at cash flow and cash to determine how healthy the multifamily market is. And cash flow might become more of an issue as the pandemic continues, unemployment remains high and the economy falters.
So far, cash flow has been solid in April and May for Princeton, Lester said. But what is June going to look like? What will happen in July and August? That will be the real test for the apartment industry.
“Cash and cash flow will be the difference maker between success and failure and us getting through this crisis,” Lester said.
Dillon also asked participants about occupancy rates. Have renters left their apartments, perhaps to move back in with their parents?
So far, they haven’t, Lavezzi said.
“Our occupancy has actually improved,” he said. “People are less inclined to move. For those who are moving, we’ve been working hard to stay open, do tours and increase our occupancy.”
Lavezzi said that Monarch properties saw an occupancy rate of 95.5 percent at the start of February. That rate stood is now north of 96 percent, he said.
Zelina said that Lifestyle Communities’ target demographic is 28- to 32-year-olds. This group is usually in some form of transition, often ready to buy a home, get married or move to a new job. This means that a good retention rate for Lifestyle Communities’ properties is in the md- to high 40 percent range.
That rate has only increased since the pandemic hit, Zelina said. Today, the retention rate at Lifestyle Communities has jumped to just below 60 percent.
“People are staying home,” Zelina said. “Because of that, our retention rate has been improving.”
Lester said that Princeton’s occupancy rate is now over 94 percent, a rate with which the company is pleased. He also said that leasing activity has been mostly strong.
“People truly value the roof over their heads, even more than we previously realized,” he said. “The stimulus has helped, too, and perhaps the fact that people aren’t spending as much money on other things right now. We don’t know how long this will continue.”
Lester said that there have been both positives and negatives so far during the pandemic. On the positive side, leasing activity is good, move-outs are lower and collections have been strong. On the negative side, multifamily owners are already dealing with lost revenue, he said.
“There hasn’t been anyone on this panel or this call who hasn’t lost some revenues,” Lester said. “There has been pain. How long and how deep will this pain become? That is something we don’t know yet. How long will this level of unemployment last? How long will the recession or retraction in our economy last? We don’t know.”
Dillon asked his fellow Berkadia pro, Nolan, what she’s seen in the multifamily world. Nolan has a good perspective: She is in constant contact with regional owners and operators in the apartment market.
Nolan said that operators are telling her that Class-A properties are faring better today when it comes to rent collections than are Class-B or Class-C apartment product. But properties overall have seen better collection rates than anticipated during the first two months of business shutdowns, Nolan said.
“The fundamentals of the multifamily market were strong heading into COVID-19,” Nolan said. “It’s interesting to listen to some of these sophisticated institutional clients. They were bracing for impact, thinking that the world was coming to an end. Pleasantly, they have found that collections have come in stronger than anticipated. They are seeing collections in that high 90 percent range.”
This doesn’t mean that there haven’t been challenging spots across the country. Nolan pointed to Las Vegas an example. The economic uncertainty has played havoc with this city. Nolan said that it might not be until the end of 2020 or earlier of parts of 2021 that the economy here begins a slow rebound.
She also said that there are parts of the Los Angeles area in which multifamily owners might struggle. The cost of housing, and renting, is so expensive here, that the federal stimulus money doesn’t go far enough to make a difference for struggling renters, Nolan said.
“We are going to see some short-term pain in this sector,” Nolan said. “Then it’s about adjusting to what the new normal operational efforts look like.”
Dillon agreed that even though multifamily has been stable during the COVID-19 pandemic so far, that the sector will face challenges as the country fights the virus throughout the summer.
The key, he said, is for multifamily owners and operators to make the changes necessary to serve their renters, collect payments and keep occupancy levels high and leasing activity strong during these challenging times.
“We all have to meet the challenges,” Dillon said. “We have had to adjust and maintain different leasing styles. We’ve had to concentrate on virtual tours. It might be about providing personal protective equipment to staffers. There might be more demands being placed on your staff as people stay home. Trash pickup might be more intense. Internet demands might be higher. There might be overwhelming package deliveries. These are all challenges to be met.”