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Residential Real Estate and COVID-19

Andrew Firestone by Andrew Firestone
April 23, 2020
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The COVID-19 pandemic and ensuing shutdown, has shocked businesses, communities, and governments alike that must now confront a new global reality. While each remains focused on health and well-being, this article highlights some of the short and long term implications for residential real estate professionals in the United States.

The COVID-19 pandemic will have a far reaching and long lasting impact on all aspects of the real estate industry. We at Savvy have collected insights from prominent stakeholders and community in the industry to help shed light on how residential real estate professionals are affected by and responding to the COVID-19 crisis.

Short Term - Decreased Leasing Velocity, Increased Operational Costs, Fear of Defaults

In the short term, brokers and leasing managers are most affected. Social distancing requirements in major metros make in person showings impossible, screenings exclusively digital, and tenants resistant to moving. Executed leases are down 40% nationally (RealPage). Travel and labor restrictions place further limitations on filling vacant properties.

For brokers and property managers, our research indicates lower leasing velocity, increased operational costs, and a fear of high default rates without the ability to pursue evictions, especially in low to medium income households. These business pressures have leasing agents focused on diversifying marketing channels to unlock demand, implementing creative incentive programs for retention and referrals, and decreasing operational overhead.

Following April rent rolls, we have collected live data regarding rent payment performance and leasing volume. Two weeks into April, 84% of rent payments had been made, only a 6% decrease compared to the same period in 2019. This is encouraging for operators and renters after 31% of renters failed to pay through the first 5 days of April (New York Times), compared to 18% from the same period last year.

Rent payment performance has varied across geographies and product types. Class A had seen a 9% decrease in share of rent payments made by the 5th of the month, while Class C had seen a 17% decrease (RealPage). These results directly correlate with low and middle-income renters being more likely to work in industries most impacted by COVID-related layoffs (Pew Research Center).

The story is similar across metro area types  — cities with higher concentration of professional and business services workers have been more insulated against delinquencies. California in particular has avoided delinquencies at a higher rate due to flexibility surrounding remote work and earlier, more proactive social distancing and shelter-in-place measures.

Moratoriums on evictions and mortgage forbearance measures should prevent widespread foreclosures but it remains to be seen how delinquent renters and debt-laden operators will recover once those measures lift. There has been some momentum behind even more aggressive policy and civic proposals in New York, including rent freezes, using existing security deposits in lieu of rent, and even a rent strike (Newsweek, Bloomberg, RentStrike.org).

Immediate Mitigation

Anecdotally, we have seen a fundamental shift in business strategy and risk tolerance as operators start to sacrifice margin to maintain occupancy. Managers are negotiating lease extensions at reduced rates, implementing creative referral programs in lieu of traditional marketing spend, and actively communicating and working with tenants on payment plans (unthinkable two months ago given demand dynamics).

Operationally, renters, brokers and leasing managers are turning to automated leasing, marketing, and management technologies. Online rent payments are up 20% (Realpage). Brokers and property managers are hosting self-guided or virtual showing and turning to financial service start-ups that offer institutional lease guarantees and security deposit replacements.

After the lockdown lifts we expect online share of activities like payments, tenant screening, and lease signing to remain elevated.

Longer Term ,  a New Normal

We expect the crisis to impact operators in a way that accelerates their adoption of technology and new operating methods in a sustained way. There is a laundry list of potential impacts: increased vacancies stemming from lost wages and no way to fill them, compressed rents from a looming global recession, all time low interest rates spurring increased refinancing activity, decreased transaction volume, cap rate increases due to uncertainty and perceived increased risk across asset classes, and construction shutdowns creating a supply dip 3-5 years out.

Some operators will also likely default on their debt payments as renters default on their leases. This exposure is especially present in the mom and pop owner operator segment that has out-sized financial exposure to income loss. Large multifamily operators in the United States are better positioned to survive due to cash reserves, access to debt, and portfolio diversification across geographies and asset classes.

In the next several months, as the market starts to open back up, operators will be tempted to loosen screening criteria to maximize occupancy. We urge caution . Despite how critical occupancy is for optimal NOI, lower approval standards is typically coupled with higher default rates which is especially dangerous if eviction moratoriums are extended.

We expect coastal cities like New York to extend eviction moratoriums until at least June 20 (NY State Executive Order). Defaults and zero-revenue occupancy will be a significant drag on operators’ ability to recover when the market rebounds. And the market will rebound . Rental demand growth remained strong even through the Great Recession (Harvard).

Projecting long-term consequences in such uncertain and fluid environments is always risky but increased technology adoption across the residential real estate industry is here to stay. These new technologies increase the efficiency and performance of real estate professionals, decrease risk exposure, and improve business operations at every level of the value chain, enabling real estate organizations to combat uncertain times.

Andrew Firestone

Andrew Firestone

If you are interested in learning how Savvy can help your brokerage or property management business decrease costs and improve business efficiency please reach out to our team at andrew@savvyscreen.com or chou@savvyscreen.com.

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