Blog March 13, 2020

COVID-19 and multifamily: Potential impacts

By Brian Zrimsek

Clearly, COVID-19, aka the coronavirus, is top of mind these days. The World Health Organization has designated it as a pandemic, the number of infected individuals continues to grow, and decisions increase by the day. So, what might we expect for the multifamily real estate industry?

Before diving in, it is important to note that the degree of the impact will grow with the duration of the crisis. If things resolve in a matter of weeks, the impact will be much smaller, and we’ll likely avoid a prolonged dampening of economic activity.

Student and senior housing: Early impacts

As it stands, many colleges and universities have either cancelled classes or moved to a fully digital delivery method. Some are extending Spring Break. Some are cancelling the semester. It follows that if students are going home early, then the first segment of the market that will feel pressure is student and student-adjacent housing.

Impacts in the current period may arise from students or parents looking to break leases early as a result of unforeseen school closures. Leasing for future periods may also be impacted as students are no longer in close proximity, making traditional on-campus marketing programs less effective.

Student housing operators will need to be prepared for the eventual questions from current students as university schedules change, causing early move-outs. Digital marketing and leasing will become more important to connect with students for future semesters, driving all aspects of the lead-to-lease process into digital channels.

Senior housing has a different set of challenges to monitor and address, given that mortality rates of COVID-19 typically increase for people over 70. Expect to see changes in community programming and a focus on reducing gatherings of people, coupled with increased focus on cleanliness in common areas.

Conventional, market rate housing: Trickle-down impacts

For conventional, market rate apartments, we must look at likely impacts on current residents as well as potential impacts on future demand.

Risk aversion is greatly reducing large gatherings of people. Governmental guidelines, conference cancellations, sporting body reactions, political rally cancellations, and changing corporate travel policies will continue to drive negative impacts on local economies. Even a coronavirus conference was cancelled due to a local outbreak.

All major sports leagues in the US have suspended play. The NCAA’s flagship event, March Madness, is now cancelled. Broadway is closed. Sporting and event venues tend to be surrounded by a cottage industry of bars and restaurants that will surely feel a disproportionate impact. We can expect a number of business to close or to furlough staff as a result.

In addition to pre and post-game meals and entertainment, impacts will be felt across transit, parking, merchandise, and in-venue vendors. Immediate impacts in the hospitality and travel sector will yield a reduction of incomes, and possibly temporary or permanent loss of employment until we return to normal operations.

If we couple this impact with a survey conducted by the First National Bank of Omaha in 2019 that indicates that nearly half of Americans are living paycheck to paycheck and more than half do not have an emergency fund, it is likely that some residents will have a hard time making their rents. Landlords should be prepared to address these situations as they emerge and not be too quick to create vacancy.

Landlords who also manage retail spaces that are reliant on event-based traffic should be prepared to address tenancy issues on that front as well.

Multifamily housing: The impact of staying home

With commercial and educational organizations sending people home, the average number of people onsite at residential properties throughout the day is sure to increase. Much like senior housing impacts, we can expect a reduction in group events. We can also expect fewer users of common areas and amenities as people stay at home.

And that phrase, “stay at home,” may be a clue to resident attitudes as the summer leasing season approaches.

If the coronavirus crisis extends beyond April, we can expect lower demand for vacant units. We can expect more folks to stay in place as economic unrest will cause people to be cautious. Staying in place may be seen in the form of higher renewal rates, at prices capped by rent control measures in some markets, or more folks going month-to-month until they have clarity in their own personal situation.

As mentioned with student housing earlier, we can expect a greater focus on digital marketing to drive demand. Self-guided tours, the trendy topic at recent industry events, will become more pervasive as prospects seek to limit person-to-person engagement. We should also see an increase in 3-D tours, drone footage and other digital mediums to drive traffic. Operationally, online leasing and electronic payments, both widely available technologies, should see increased adoption.

If we do see a drop in demand and an increase in renewal rates, there will be an unmistakable impact on pricing. This change in market dynamics will put revenue management systems and processes to the test. Largely having gained wide adoption in the last decade of continued growth, there have not been many cases of dealing with sagging demand and the impact on pricing.

Development: Supply chain impacts

In August of 2019, the NAA published an article titled “Apartment Completions Set to Spike in 2020,” which shared that there are more than 500,000 units under construction, with nearly 360k of them scheduled to deliver in 2020. It has yet to be seen if global supply chain disruption, as a result of this virus, will impact these deliveries. Materials as simple as an electrical outlet, often produced in China, could become a barrier to delivery if supply lines are disrupted. Developers should assess impacts of potential material shortages and adjust accordingly.

A disruption in delivery plans will put pressure on financing as well as planned operational benefits, creating the potential for a myriad of fiscal issues for developers, owners and operators.

Actual v budget: Expect variances

Most multifamily organizations cast their budget in the fall of 2019 and looked at 2020 as more of the same: strong demand, strong occupancy, strong pricing and a need for more capacity. A straw poll of MRI conference attendees put a potential recession in 2021 or beyond. While we may or may not have a formal recession, the impacts of this virus, if experienced for a protracted amount of time, could create recession-like conditions, undermining the assumptions used to build 2020 budgets. Reforecasting conversations will need to happen. Expectations will need to be reset and the inevitable conversations about expense reductions will likely take place.

Business continuity

Beyond the economic and fiscal dimensions of this crisis, multifamily organizations should update their business continuity plans (BCP), seek new ways to leverage technology since the BCP plan was last updated, and revisit policies in accordance with governmental guidance for health and safety.

American writer Denis Waitley once said, “Expect the best, plan for the worst, and prepare to be surprised.” Sage advice, given the current state of affairs and the uncertainty inherent in not having a clear idea of what lies ahead. Multifamily organizations should already be taking steps to assess changing conditions and plan accordingly.

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