Some observers think the telework trend is just getting started.

With remote working increasing and oversupply a concern in urban markets, trends seem to favor suburban apartments in the future.

Some households will move to lower-cost areas to maintain a similar quality of housing or amenities for less money. 

“We do see some strengths with suburban apartments,” says CoStar Advisory Services Consultant Joseph Biasi. “If this work-from-home trend is going to be a little bit longer term, people will feel more comfortable with moving out into the suburbs.”

That could mean more high earners leave the city. “We’ll see some of those higher-income households pushing out into the suburbs and taking advantage of cheaper rents,” Biasi says. “On top of that, they’ll have a little more space because they’re in a city anymore.”

But Biasi doesn’t think it is just a temporary trend. “We also think that working from home is going to extend a bit longer,” he says. “It’s going to be a trend in the next couple of years and we’re just starting to see the beginning of it.”

Many will favor larger apartments and higher-quality space due to social distancing. “Some people just don’t want to be in enclosed, dense areas,” Biasi says. 

As people move to suburban apartments, they will end up in some areas without much new supply. 

“Prime suburban areas weren’t seeing that much of a supply pipeline,” Biasi says. “So apartments located in those areas are going to benefit from this entire flight to lower density that we’re seeing.”

These higher-level suburban properties are already performing well. “They’re actually outperforming any other [apartment] type,” says CoStar Portfolio Strategy Senior Consultant Juan Arias.

Without this new supply, there are fewer high-quality apartments in the suburbs, according to Biasi. “Absorption and rents should rise in those properties. “We’re not that necessarily concerned about [performance] in high-quality suburban apartments,” he says.

But there are still some signs of concerns in suburban apartments. “The lower-quality [apartment] space has more tenants at risk of financial instability in the suburbs,” Biasi says. “Most of the economic impacts of the virus are at the lower-income levels.”

These are the people who have been hit the hardest by layoffs, job loss, and income loss. “Low-income workers feel little financial stability,” Biasi says. “You can see that with those making less than $75,000. So the people who would likely be in a three-star [apartment community] or below are the ones who are feeling less financially stable. So we would expect that to show up to some degree in those lower-quality apartments.”

That is different from concerns in urban areas, where supply plus the exodus of some workers is the issue. “In the urban areas, the risk is a supply overhang plus less demand in the higher quality space as those high-income households begin to shift back out to the suburbs,” Arias says. 

 

Source: GlobeSt By Les Shaver | October 19, 2020 at 07:34 AM

Evictions plummeted even in cities without eviction bans.

You probably read over the last six months about a looming evictions crisis of historic scale. It’s been described as a “tsunami” and an “avalanche.” Some forecasters predicted as many to 30 to 40 million renters could be evicted.

What happened? Not much—and that’s wonderful news. Americans will likely experience a record low number of evictions in 2020. Eviction filings since COVID-19 hit in mid-March have plunged 67% from normal levels in the 17 markets tracked by Princeton’s Eviction Lab. Evictions plummeted even in cities without eviction bans. And all reliable indicators continue to show renters are (so far) paying their monthly rent at near-normal levels. This is good news not only because millions of renters haven’t been displaced as feared, but also because accurate numbers lead to more targeted, more affordable policy solutions that, in turn, increase the odds of lawmakers finally approving much-needed direct aid for renters truly in need.

How did forecasters get it so wrong?

It’s easy to credit a patchwork of local and state eviction moratoriums—followed by the CDC’s national ban enacted in September. But our extensive analysis reveals that moratoriums are just one of many critical factors limiting evictions in 2020. Some of the forecasters who made headlines for doomsday predictions chose to ignore or give scant attention to critical factors helping keep evictions low—high rent collection rates, sympathetic property owners working overtime to accommodate distressed renters, and backed-up court systems.
Interestingly, dire headlines typically trace back to just three forecasters with peripheral connections to real estate. At the same time, media reports frequently downplayed studies from real estate researchers showing significantly less distress— including those from RealPage, the Mortgage Bankers Association, and the Urban Institute.

One of the most widely cited eviction prognosticators is Stout, a consulting firm that has done several studies on evictions for different organizations. Stout forecasted about 11 million potential eviction filings over a four-month period beginning May 13, according to the consultant’s website, among the 16.2 million households “at risk of eviction.” Stout also predicted 2 million eviction filings in both August and September – meaning 4x the annual number in just a two-month period. Both estimates appear to have overshot by a huge margin. Stout remains very bullish on evictions. In a September report produced for the National Council of State Housing Agencies, Stout wrote: “Stout estimates that by January 2021, up to 8.4 million renter households, which include 20.1 million individual renters, could experience an eviction filing.” That outlook appears highly unlikely.

Another forecast that grabbed headlines came from the Aspen Institute, a think tank, in conjunction with the COVID-19 Eviction Defense Project. This group estimated in June that “19 to 23 million, or one in five of the 110 million Americans who live in renter households, are at risk of eviction by September 30, 2020.” While there is no uniform measure for “at risk,” there is plenty of evidence that actual evictions through September ended up a small fraction of Aspen’s forecast. Curiously, even as the economy showed signs of gradual recovery over the summer, Aspen doubled down in a follow-up report in August, estimating that “30–40 million people in America could be at risk of eviction in the next several months … If conditions do not change, 29-43% of renter households could be at risk of eviction by the end of the year.” That scenario appears nearly impossible to pan out.
A third forecaster, Amherst, opined in May the possibility of evictions registering “in excess of the levels we saw in the wake of the Great Recession.” That view has, so far, proven incorrect.

How did forecasters err so dramatically? A study of methodologies and additional datasets reveals multiple explanations. Most of the dire forecasts inexplicably downplayed or ignored a number of major factors that have kept evictions low: relatively normal rent collection rates, widespread eviction moratoriums, a delayed legal system, and a sympathetic base of property owners providing extensive measures to give renters unprecedented flexibility.

Instead, some “tsunami” forecasters leveraged questionable assumptions and experimental datasets. One forecaster, for example, initially assumed a 25-30% unemployment rate (roughly triple the current rate). Others relied heavily on a new Census dataset called the Household Pulse Survey, which the Census itself labels as “experimental” and discloses the risk of overstating distress due to non-response bias.

Additionally, good forecasts wisely separate newly (or additionally) distressed households from the millions challenged even prior to the pandemic, as the latter group is largely accounted for in pre-pandemic eviction baseline numbers. Failing to make that distinction can inflate eviction estimates.

Why does accuracy matter? Because as Congress continues to wrangle over relief packages, bloated price tags decrease the odds of approval for much-needed direct renter aid programs and increased funding for new affordable housing. Both are badly needed.

It’s tremendous news that evictions remain so low. But we also must acknowledge that renter distress is very real and was very real even prior to COVID-19. Evictions would be much higher this year if not for the yeoman efforts of property owners, eviction moratoriums, and—most importantly—the millions of renters paying rent every month. Right now, property owners are taking on much of the burden. But that’s unsustainable, adding more risk for an already fragile U.S. economy. Additionally, the CDC’s national eviction ban is merely a bandaid. Rent is still due when the moratorium expires, and direct renter aid programs are needed to protect both renters and property owners (most of which are small family businesses).

Defining the problem accurately allows for more precise, targeted, affordable solutions. Well-intended researchers may be unintentionally sabotaging their own cause.

 

 

Source: GlobeSt By Jay Parsons | October 05, 2020 at 06:53 AM

6 Tips for Tackling Multifamily Due Diligence Right Now

Multifamily deals are seeing a surge right now, despite COVID challenges. Multifamily investors need a good formula to make the due diligence go smoothly – here are 6 tips to execute successfully.

Multifamily due diligence during COVID poses challenges

The multifamily sector has weathered the recession reasonably well and is now seeing a surge in activity in the last couple of months, boosted by low-interest rates.  This comes at a time when there are still some mismatched expectations between buyers and sellers, and any real estate deal could be challenged by the new realities that COVID presents.  Multifamily investors need a high level of scrutiny of their prospective assets, but this can be tricky given potential access and timing challenges.  Yet despite these hurdles, we as an industry are adapting and finding ways to get deals done – buyers are getting creative in their search for value, and everyone is bringing a problem-solving mindset to the process.

This is especially important during the due diligence stage.  Having been on both sides – leading acquisition due diligence at a national multifamily investor, and now delivering due diligence with a national consulting firm – I’ve found that the winning formula is a higher level of coordination, communication, and creativity to make it work.

Here are six tips to help your acquisition due diligence go smoothly right now.

  1. Coordinate and consolidate your site visits – If possible, aim to have your entire due diligence and lender team walk the property and units at the same time. Nowadays, limiting intrusions is not just a matter of inconvenience for the residents and sellers, but of safety and peace of mind.
  2. For value add / reno projects, don’t skimp on access – Lately, I’ve been seeing a lot of demand for proven properties with an established rent roll that are prime candidates for renovation work, as they may be seen as a more moderate bet in today’s climate rather than a property that is in lease-up or has just stabilized.  For these deals it is important to ask your Property Condition Assessment consultant to get eyes on more of the property including every unit if possible, instead of only seeing a sampling of 10-20% of the units, to unearth any potential physical deficiencies you need to account for.  The more of the site your consultant sees, the greater confidence you’ll have in cultivating your operating and capital management budgets.  This can be a challenge during COVID, which brings me to point #3.
  3. Get creative with virtual site visits – We’re there to be your eyes and ears and see as much as we possibly can, but if we can’t get into a unit or other interior areas, we’ve been having success with virtual site visits. It’s a pretty easy process to have the on-site management staff conduct a video call with Zoom or MS Teams on their phone or tablet device, while we instruct them on what to show or focus in on.  There are some limitations, for example, poor lighting or connectivity, but it is a useful option in this challenging environment.
  4. Have a plan for communication – In this atmosphere of heightened anxiety, it’s important to have a good communication plan. The key for effective communication is to confirm with all parties on what is acceptable to say or not during the site visit or personnel interviews – it is common to not divulge to the on-site management company or the residents that the property is for sale. Additionally, to help keep the residents and on-site staff at ease, it is prudent to convey that all site inspections are being conducted with their safety in mind and any inspecting personnel including third-party consultants and engineers are adhering to all mandated health & safety precautions including the use of PPE.
  5. Allow extra time – It’s no surprise that more residents are home right now, and that can require some extra coordination and time to arrange access to the units while maintaining social distancing – residents may step outside or stay in different rooms while the assessor(s) walkthrough. Understandably, many tenants may also want extra reassurance that the site assessors are wearing PPE and using gloves or paper towels to avoid touching surfaces.  Additionally, be sure to account for the possibility that some units may be unavailable to be inspected due to the resident(s) of the unit being diagnosed with COVID and having to quarantine for the required 14-day time period. This may mean that you will have to inspect this unit at a later date or not at all given the allotted time for your due diligence period per the PSA.
  6. Understand lender requirements and flexibility – If you are obtaining financing, you’ll need to understand not only the requirements of various lending platforms but also what flexibility they might offer due to the unique situation we’re in. Some lenders may be flexible on their financing requirements including amending or modifying the required number of units to be seen or whether they’ll accept virtual site assessments, but others may not be so willing.  You’ll need to factor that into your due diligence approach.  And, if you’re pursuing green financing from  Fannie,  Freddie, or  HUD, or are planning to add solar, there are specific scopes of work and timing requirements so make sure your consultants are well versed in those.

With the right formula and a solid team, multifamily investors can ensure a successful and on-time transaction.

 

Source: GlobeSt By Ronnie Harrell | September 30, 2020 at 04:47 PM

Rent debt improved slightly in September as the economy has continued to improve and add back jobs.

The lack of a new federal stimulus package has not had a negative impact on rent debt—back rent payments owed to landlords—since the CARES Act relief expired in July. Rent debt improves slightly in September, with 32% of renters owing back rent to landlords down from 34% in August, according to data from Apartment List. This improvement has occurred in step with economic recovery and the addition of lost jobs.

“Despite the expiration of federal stimulus provided through the CARES Act, the economy has gradually been adding back jobs, indicating that we’ve started down the path of what will likely be a drawn-out recovery,” Christopher Salviati, housing economist at Apartment List, tells GlobeSt.com. “With some Americans starting to get back to work, the rate of non-payment has not worsened. That said, the rate of missed payments remains elevated, and we find that even many of those who are able to pay their rent are making significant financial sacrifices to do so.”

While the share of rent debt among renters is improving, it is still high, with more than a third of renters owe back rent payments. “The fact that so many Americans are struggling to pay their rent is putting downward pressure on rent prices,” says Salviati. “We find that among those who say the pandemic has made them more likely to move during 2020, the most commonly cited reason is the need to find more affordable housing. Many of these renters are likely moving back in with family or friends to relieve financial pressures. High-priced markets and luxury units, in particular, are seeing a drop off in demand lead to stagnating or falling rent growth.”

Eviction moratoriums have played a role in increasing missed payments—while also decreasing the number of evictions. These protections have expired in some areas, but in others—including the state of California—eviction moratoriums have been extended through the end of the year. “Eviction moratoriums have been an important tool in maintaining housing security for those that are struggling during these unprecedented times,” says Salviati. “We haven’t seen evidence that these protections are leading to higher rates of missed payments—renters who are able to afford their rent are continuing to make payments, and in fact, many are going to great lengths to stay current on their rent in spite of the protections in place. Rent debt is likely to be an issue through the end of the year with or without the presence of eviction moratoriums.”

Rent debt isn’t only a burden for renters—who are struggling to make payments and stay in their homes during a public health crisis—but it also places a burden on landlords. Many landlords are not able to maintain ownership with decreased cash flow. “Many landlords operate on relatively thin margins and rely on complete and timely rent payments in order to pay the mortgages on their rental properties. Widespread issues with rent non-payment will certainly impact landlords as well,” says Salviati. “That said, many lenders are offering options for mortgage forbearance, which may relieve some of this pressure.
Source: GlobeSt By Kelsi Maree Borland | September 25, 2020 at 02:00 PM

About six weeks into the pandemic, leasing activity returned to normal levels, but the leasing process has changed.

The pandemic immediately impacted apartment leasing activity, but about six weeks into the pandemic, leasing activity rebounded to normal levels. Quarantine, distance learning, and work-from-home policies encouraged people to move to more accommodating homes, driving leasing demand. However, the leasing process has changed since the onset of the pandemic, and those changes—virtual leasing—will take longer to return to normal.

“At the outset of the pandemic, as people adjusted to stay-at-home orders and physical distancing mandates across a number of U.S. states, our early data suggested a significant decrease in lead volume,” Stacy Holden, industry principal and director at AppFolio, tells GlobeSt.com. “However, after about six weeks, leasing activity largely rebounded to expected levels—there are geographic differences as the timing of the impacts of the pandemic vary, but people still want to move to places that meet their needs. In fact, one could argue that the experience of quarantining at home for so many months has led many renters to seek out their next home, eager to get a change of scenery or something better suited for their new normal.”

In addition to changes in lifestyle, like work-from-home and remote learning, which created demand for larger spaces, many people also had the flexibility to move further away from work to more affordable markets. This trend, again, drove leasing activity. “With many people having had the ability to work remotely this year, the need to live close to the office may have diminished for some,” says Holden. “Without it, it may have encouraged some people to find homes in less densely populated areas, outside of urban centers, ultimately increasing leasing demand in the suburbs and decreasing it in major cities. Additionally, urban areas that are home to many colleges and universities are seeing increased vacancies due to students not coming physically back to school this semester.”

However, it is more challenging to lease units today than it has been in the past. “Pandemic or not, vacancies will always occur. The problem is not that units are sitting on the market without movement—the demand is still there in many regions—the problem so far is that it is simply harder to move the leasing process forward in a remote reality,” says Holden. “But in any case, now is the time for property managers to prepare their operations to succeed in any market conditions.”

This change in the leasing process has been more of a disruptor than the abrupt drop in leasing activity at the start of the pandemic. “Leasing has always been an in-person process, so the shift to physical distancing is a major disruptor to the way the industry has historically converted leads into new residents,” says Holden. “This is the biggest trend in leasing during the pandemic—a monumental shift to conducting leasing activity virtually. It is also a trend that we actually anticipate remaining for the long term, given the flexibility and convenience it provides prospective residents and leasing agents alike.”
Source: GlobeSt.com By Kelsi Maree Borland | September 22, 2020, at 02:00 PM