There’s no denying that COVID-19 has hit the owners of multifamily properties hard. But there’s also no denying that the multifamily market was one of the strongest commercial real estate sectors before the pandemic hit. And that’s where the hope lies, according to a panel of top apartment who participated in latest Breaking Through the Disruption webinar from REjournals.
During the webinar, The Impact of COVID-19 on the Apartment Market in Minnesota, Keith Collins, executive vice president with CBRE; Chris Sherman, senior vice president of operations and capital markets with Sherman Associates; Ted Bickel, senior vice president with Colliers International; and Brent Rogers, owner of Saturday Properties, said that apartment owners are relying on virtual tours, enhanced cleaning schedules and open communication with tenants to survive the pandemic.
They also said that renters in the Midwest have been surprisingly good about paying their rents on time, even during the pandemic, and that they expect apartment renewal rates to rise.
That was the good news. The bad news? There’s still plenty of uncertainty in the multifamily market. And until state economies reopen and consumers are confident enough to get back to work, dine out at restaurants, hit the gym and shop, that uncertainty isn’t going anyway.
That, panelists said, is the new normal with which apartment owners must deal.
“A lot of our customers have experienced hardships,” Sherman said. “Our objective is to minimize the number of evictions coming through this and to do whatever we can to serve our customers.”
What does this mean? It might mean setting up repayment plans to help those tenants struggling to make their rent. It definitely means communicating with renters frequently.
In the case of Sherman Associates, it’s also meant getting creative. Sherman said that the company provided tenants a 5 percent discount for timely rent payments in April and May. If residents didn’t pay their rent by the fifth of the month, that discount disappeared. Sherman said that this incentive helped Sherman Associates’ buildings achieve higher rental collections than they might otherwise have seen.
Apartment owners are making big changes when it comes to managing their properties, too, Sherman said. Sherman Associates is holding virtual tours of their properties for prospective tenants. The company is only approving emergency work orders for their properties, putting less important work projects on hold for now.
The company’s team members wear face masks when in Sherman Associates’ properties. Hand sanitizer stations have been installed throughout buildings.
“It’s been a major shift in how we interact with our customers,” Sherman said.
And some of these changes? Sherman said that they will remain in place even after the COVID-19 pandemic passes. Virtual leasing initiatives are a good example. Sherman said to expect apartment owners and managers to rely more on virtual tours and meetings in the future.
Rogers of Saturday Properties said that most tenants in his company’s buildings are still paying their rents. In April, for example, Saturday Properties collected about 94.5 percent of their rents on time. That delinquency rate of about 5 percent is doubled from April of 2019, Rogers said, but is still a strong number considering the economic turmoil brought on by COVID-19.
At the same time, renewal rates at Saturday Properties were up for the first four months of the year by about 20 percent when compared to the same period a year earlier, Rogers said.
“We are shifting our business to whatever this new normal is,” Rogers said.
This does mean an emphasis on virtual tours. But Saturday Properties is also conducting contactless tours, in which prospective tenants can tour buildings and visit their potential apartment unit without having any direct contact with building staff, Rogers said.
The next challenge? Apartment owners need to determine when and how they can reopen their building’s common areas and amenities.
“Folks have been pent up for two months in their 500-square-foot or 600-square-foot apartments,” Rogers said. “They are eager to get out and use the fitness centers and other common areas of their buildings. We are putting a plan together to slowly start reopening those amenities. Our primary focus is on the safety of residents and staffers.”
Rogers said that in late March and early April, Saturday Properties’ buildings were still getting traffic and still leasing units. Those numbers, though, are down: Rogers said that traffic was down about 40 percent when compared to the same period a year ago, while the company closed about half as many leases in April of this year when compared to April of 2019.
Both Rogers and Sherman said that apartment renewals have increased. Sherman said that this makes sense: Fewer renters are moving today because of the pandemic. Instead of buying a single-family home or moving to a new apartment, they are renewing their leases.
“People don’t want to move during COVID-19,” Sherman said.
Collins with CBRE asked Sherman, whose company owns rental properties in markets across the country, how the Minneapolis market compares to the other cities in which Sherman Associates runs apartment buildings.
Sherman said that Midwest markets in general are holding up better today than those in other parts of the country. Collection rates are higher in the Midwest. Sherman’s company owns properties in the Twin Cities, Des Moines, Milwaukee and Denver.
“Stimulus and unemployment funds have helped people to make their payments here,” Sherman said. “We have more affordability in our markets than they do in some other parts of the country.”
Bickel from Colliers International asked Sherman and Rogers whether tenants have asked for any rent reductions in part because they can’t use the common-area amenities at their apartment buildings.
Rogers said that early on, tenants did log complaints about not being able to use these amenities. But those complaints have died down as tenants realize the seriousness of COVID-19. Today, Saturday Properties is working on a plan to slowly reopen their buildings’ amenities. How long this will take is still unknown.
Sherman said that the unavailability of common-area amenities was one reason why Sherman Associates’ instituted its 5 percent discount for on-time rent payments. The goal now is to slowly reopen amenities with social distancing and limited capacity by the end of May.
Panelists also addressed deal flow. Will apartment sales close during the pandemic?
Collins said that deal flow will almost certainly slow.
“We need consumer confidence to come back,” Collins said. “Until we get a vaccine, it’s going to be hard for deals to get done.”
On the positive side, Collins said, there is a lot of equity available. And unlike during the recessionary years of 2008 and 2009, that equity wants to go somewhere, Collins said.
“Sales volumes will be slow the next couple of quarters,” Collins said. “But I do think that once we have some confidence, sales volume will come back strong.”
Bickel wondered if outside investors will continue to seek out the Twin Cities apartment market. This sector had been attractive to investors from across the nation and globe before COVID-19 put a halt on deal flow. But will outside investors today want to take a chance on entering the Twin Cities market?
“I wonder if we will see less new capital coming into the market,” Bickel said. “The groups that are already here have the ability to do tours locally and they have a familiarity with the market. They aren’t facing as much uncertainty. Groups from outside the area won’t have that same familiarity.”
Collins agreed that it’s the uncertainty that gives him pause.
“It’s hard to transact in uncertain times,” he said. “As we get more confidence and less uncertainty in the marketplace, sales volume will pick up.”
Sherman said that Minnesota even during these challenging times remains an attractive market for investors. He said this should help the state weather the uncertainty and economic slowdown brought on by COVID-19.
“Minnesota presents a lot of long-term upside,” Sherman said. “We are in a very affordable market in the Twin Cities compared to other major markets across the country. Our parks system, our space, is playing very well during this period. To have enough outdoor space is making a difference. Living here is better during COVID-19 than it is in other parts of the country. As more people spend more time working from home and traveling less, multifamily in the Twin Cities will continue to do well long-term.”