What COVID-19 Might Mean for the Multifamily Sector
Justin L. Sylvan
The COVID-19 pandemic has had a dramatic impact on almost every industry, including real estate. Owners, investors and developers are already seeing ripple effects across sectors. It is important to learn how the virus might bring changes to multifamily housing that could endure or, at least heavily influence, the future.
Related Read: Consider a Turnaround Strategy for COVID-19 Problems
The current environment
Unprecedented layoffs in March and April 2020 triggered fears that many households would no longer be able to pay their rent. That did not happen, at least not in the professionally-managed apartment properties sector of the rental housing stock. However, rent collections on multifamily properties largely remained stable throughout 2020.
According to National Multifamily Housing Council, the share of households meeting their rent obligations ranges between 93% and 95% for each month since the initial U.S. outbreak, in most months off no more than two percentage points from earlier-year results. The ability of tenants to meet rental obligations probably was due in no small part to economic stimulus from the federal government in the CARES Act. In addition, since people always need housing, multifamily properties historically perform better than other commercial real estate classes. In contrast to office and retail, which ebb and flow dramatically with supply-and-demand cycles, multifamily typically remains stable and often continues to grow when other parts of the market constrict.
Related Read: What You Need to Know About the CARES Act and Qualified Improvement Property
However, not everyone is optimistic. There is a concern in the industry that if the median household income drops in the coming months, rent collections could drop. When combined with eviction moratoriums, this could spell trouble for landlords. The good news is that renewal rates have been high. Renewal rates – which had been climbing steadily since 2010 – were boosted in 2020 as many renters were unwilling or unable to relocate due to the COVID-19 pandemic. Data sourced from the RealPage platform indicates that 53.3% of renters with leases expiring in July 2020 chose to renew their lease and stay put rather than move out. That is the highest rate on record for July ever recorded.
Renters choosing to renew their leases have been getting a break on renewal rates due to the pandemic. From 2011 to 2019, renewal rent trade-out – the change in rent for renters renewing leases in the same unit – has typically averaged between 4% and 5%, varying little over that time. However, this year has been different. While 2020 started out with rates averaging about 3.5%, renewals plunged into slightly negative territory by April, as landlords essentially halted any planned increases for renters forced to stay in place during mandated lockdowns.
Related Read: The Real Estate Industry Awaits a Return to Normalcy and Focuses on Tenants, not Valuations
As part of the federal government’s response to the COVID-19 pandemic, the Coronavirus, Aid, Relief and Economic Security Act (CARES Act) established a 120-day eviction moratorium for evictions based on non-payment of rent for certain covered properties. The CARES Act eviction moratorium began on March 27, 2020 and ended on July 24, 2020. Covered tenants could not be forced to vacate and landlords could not file notices to vacate until 30 days after the expiration of the moratorium.
On September 4, 2020, the Centers for Disease Control and Prevention (CDC) imposed a nationwide temporary federal moratorium on residential evictions for nonpayment of rent. The stated purpose of the order is to prevent the further spread of COVID-19, specifically by preventing homelessness and overcrowded housing conditions resulting from eviction. The action, which followed an Executive Order directing the CDC to consider such a measure, is unprecedented, both in terms of the federal reach into what is traditionally state and local governance of landlord-tenant law and its use of a public health authority for this purpose. The CDC eviction moratorium took effect September 4, 2020 and was initially slated to extend through December 31, 2020. However, it was extended legislatively through January 31, 2021, and extended again by CDC through March 31, 2021. On March 29, 2021, CDC further extended the moratorium until June 30, 2021. The CDC eviction moratorium prohibits evictions for nonpayment of rent and related fees. Please note, the CDC moratorium does not supersede more protective state and local government eviction protections.
The rules are different for renters in Illinois. Each state has different rules and it is important for renters to familiarize themselves with all eviction-related guidelines. As of July 18, 2021, the Illinois Supreme Court ordered an amendment to Order M.R. 30370 concerning residential evictions. Evictions had been paused via a statewide moratorium which ended July 31, 2021. Eviction filings will be allowed to resume on August 1, 2021. During the one-month period until September 1, judges will refer newly-filed cases to state programs providing financial assistance to landlords and tenants. On September 1, all restrictions will be lifted.
In Chicago, there is additional protection for renters. In June 2020, Mayor Lori Lightfoot signed the COVID-19 Eviction Protection Ordinance, which provides tenants additional protections if the tenant writes the landlord stating that they have had a “COVID-19 impact.”
A COVID-19 impact can be claimed when a tenant or another household member:
- Is laid-off from work;
- Has their hours at work reduced;
- Has to isolate or quarantine because of COVID-19 diagnosis or possible exposure; or
- Has to care for someone else affected by COVID-19.
Tenants who have notified their landlords of a COVID-19 impact will have the five-day notice period extended by seven days, for a total of 12 days. During the 12-day period, the landlord must contact the tenant and try to work out with the tenant a plan to avoid eviction. A plan to avoid eviction could include a repayment plan, mediation or arbitration, letting the tenant use their security deposit to cover the missed rent, an agreement for the tenant to move out without the landlord getting an eviction judgment against them, or other arrangements agreed to by the landlord and tenant.
On August 3, 2021, the CDC issued a new order temporarily halting evictions in counties with heightened levels of community transmission in order to respond to recent, unexpected developments in the trajectory of the COVID-19 pandemic, including the rise of the Delta variant. It is intended to target specific areas of the country which are experiencing substantial and high levels of community transmission levels of COVID-19. According to Senator Chuck Schumer, this eviction moratorium is expected to cover 90% of renters. Accordingly, subject to the limitations under “Applicability,” a landlord, owner of a residential property or other person with a legal right to pursue eviction or possessory action, shall not evict any covered person from any residential property in any county or U.S. territory while the county or territory is experiencing substantial or high levels of community transmission of SARS-CoV-2.
Players in multifamily housing are taking the pandemic — and tenant response — into account in their strategic planning in the following ways, among others.
A Focus on Renewals
Although renewals were promising for much of 2020, many of these were for terms of less than a year, which suggests a desire to move when more feasible. To combat this urge, some owners are working hard to provide strong reasons to stay, rather than hiking rents and trying to collect every dollar possible.
For example, many owners waived fees for amenities that tenants could not use due to pandemic restrictions and now they are eliminating the fees altogether. They are also ramping up cleaning and sanitation measures, as well as their communications, so tenants know and understand the efforts underway to keep them safe and secure.
Consideration of Convenience
Even before the pandemic, tenants increasingly sought out properties that made their day-to-day living easier. Convenience is now a critical feature, one that is important to both current and prospective tenants. This is particularly true for multifamily housing in the suburbs, where employees are following employers that have migrated outside of metropolitan areas.
These tenants want walkable retail, dining and entertainment options. They also want delivery services for food, alcohol, groceries and the like. The delivery demand may not be as high post-pandemic, but people who previously never used those services have developed a taste for them. And, of course, tenants now expect their homes to be adequately connected for their growing digital needs. Some have noted an increased emphasis on certain in-unit amenities, such as smart home devices, that help residents regulate things like thermostats, security and air quality. Best-in-class properties will increasingly look to install these in-unit devices to provide an added level of control to residents who are spending more time in their homes than ever before.
Related Read: How to Make Your Property as Profitable as Possible
Location plays a major role in convenience, but the optimal location for future construction will need to consider how the likely lingering jump in remote work will affect where people want to live. It is widely expected that the high rates of employees working remotely during the pandemic will lead to a long-term increase in work-at-home.
Given the option, people who have long reported to work in areas with pricey housing may well move to locales with lower costs of living — so-called secondary and tertiary markets, such as Atlanta, Charlotte and Memphis. Owners, investors and developers new to such areas must conduct thorough research to obtain the necessary understanding of these markets.
Some developers are betting that the heightened interest in safety and sanitation will continue after COVID-19 has passed. In light of this, they are incorporating features such as touch-free technologies in common areas. Many builders are focusing on designs to support social distancing by creating a comfortable common area experience featuring wider corridors, one-way circulation, options for separation, good cleaning and maintenance protocols, shorter or more generous common path routes and lesser or no exposure to elevators or cramped stairs.
Builders have emphasized access to fresh air and daylight via increased operable windows and individual HVAC units that continually circulate air from the outside.
One thing is certain: COVID-19 has changed the landscape. While the multifamily real estate market has done well to withstand the impact of the pandemic, those who wait for a return to “normal” will likely fall farther and farther behind their competitors. COVID-19 has prompted some shifts in market trends, which will affect tenants, landlords and investors alike. However, with the proper planning and focus on emerging trends, there is still room for investors to capitalize on opportunities in the multifamily market.
Sidebar: Technology powers cost-cutting
High unemployment rates, declining collections and eviction moratoriums threaten some significant hits to budgets. While it is difficult to predict the revenue side with any certainty, you can take steps to cut your expenses. Technological developments have made it easier than ever.
For example, technology can improve safety and cut costs. Virtual tours, now often in 3-D formats, have surged in popularity during the pandemic. These can draw in prospective tenants who are reluctant to visit properties, while also reducing the costs related to open houses, showings and traditional types of marketing.
Technology also enables the collection of vast mounds of data about markets and tenant behaviors that power smarter decision-making and more efficient, cost-effective operations. And. it can help automate and streamline tasks like procurement.
Related Read: Consider a Turnaround Strategy for COVID-19 Problems
For more information, contact Justin Sylvan at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Real Estate Group.