A Baltimore Developer’s Take on the Pandemic’s Impact
Klein Enterprises President Daniel Klein discusses how the coronavirus crisis is affecting the company’s operations and projects in Baltimore and other markets.
As the effects of the coronavirus outbreak continue to burden the U.S. economy, multifamily owners are also bracing for unprecedented challenges. Although nearly 85 percent of rental households were able to pay their rents in April, delinquencies are expected to rise and a larger impact will be felt in May, according to Daniel Klein, president of Klein Enterprises.
The Baltimore-based company has a diversified portfolio encompassing several asset types including multifamily, office/flex and retail properties. In the interview below, Klein talks about how the multifamily business is impacted when it comes to stabilized assets, projects underway and properties in the lease-up process.
What immediate effects has the coronavirus outbreak had on your operations and portfolio?
Klein: The impact falls into two main categories: health and safety, and economic impact. On the health and safety side, we’ve been working remotely for nearly a month now, like everyone else, and we took steps to increase the frequency of cleaning of common areas, even before government mandates.
On the economic side, COVID-19 has had a tremendous impact on portfolio operations, and, given our diversified portfolio, we will continue to see firsthand how different asset classes are impacted. First and foremost, the shutdowns have impacted tenants’ ability to pay rent—particularly the small mom-and-pop retail tenants who have no revenue, due to health concerns and broader government-mandated shutdowns, but also several well-capitalized national credit tenants.
This is ultimately making its way to our residential communities, as business owners who rely on that revenue are having difficulty paying rent, and companies large and small are furloughing or laying off staff. This shows how truly interconnected every aspect of the economy is, as landlords rely on these rents to pay lenders, and lenders are further controlled by the regulatory agencies who are making decisions at the macro level.
How does the impact of the pandemic vary across asset types? How do you see this trend evolving?
Klein: As it relates to our portfolio specifically, we’ve seen the smaller in-line retail tenants hit the hardest and fastest, due to the lack of cushion. On the office/flex side, it largely depends on the specific business line of the tenant, but this will start to become clearer in the coming weeks and months. On the residential side, both delinquencies and formal requests for relief will continue to pick up in the coming weeks, as the impact of business closures works its way through the system. Storage facilities have remained more resilient but, again, are likely to show signs of rising delinquencies in the coming weeks. It’s just too early to determine the overall extent of the impact on each asset class at this point.
How is Klein Enterprises responding to the crisis?
Klein: On the health/safety side, we were early adopters of social distancing—choosing to work remotely before the public mandates and formal closures. On the economic side, we immediately set up a crisis management team consisting of our executive team, as well as directors of property management and leasing. We’re addressing everyone’s requests to the extent possible and are simultaneously working through arrangements with lenders to pass through relief to tenants.
Were your multifamily operations in Baltimore affected? What do you expect going forward?
Klein: It’s really too early to tell—we expect delinquencies to rise in the near future, with the larger impact felt in May rather in April.
One of your Baltimore properties, The Woodberry, is scheduled to open this spring. What is the current status of the development?
Klein: We were fortunate that we completed most of the construction before the impact. We’re working through the final stages of certain inspections that may be delayed due to the shutdown, and then shifting our focus to the impact on lease-up, which will undoubtedly be impacted by people’s inability to view the apartments. That said, we’ve implemented virtual leasing and we are updating our marketing strategies. We are working through the final stages of building as effectively as possible, recognizing that construction remains an essential business here in Maryland.
Do you have other multifamily projects that have been impacted by the pandemic? Tell us about your strategy to overcome these difficulties.
Klein: Yes. It’s hard to imagine that any multifamily owners are immune to the economic impact. As it relates to stabilized assets, several of our properties have started to show a reduction in rent payments and we imagine this will continue to rise. While it’s still very early, we’re likely to see greater distress in smaller suburban communities largely dependent on a more limited and less diverse employment base, although the impact remains widespread.
On the development side, we’re working through closing a large construction financing deal in northern New Jersey and we’re moving ahead with the planned loan closing and construction, while we are fully aware that the timing could change at any moment. On the leasing side, we’ve employed virtual tours and have a fully accessible—albeit mostly remote—workforce who can address issues as they arise. We’re constantly in touch with all our property managers and leasing teams to address the shifting landscape.
How will the current crisis impact the multifamily landscape in the long term?
Klein: We believe in the long-term demand for multifamily housing, both in Baltimore and throughout the broader Mid-Atlantic and the U.S. This crisis will undoubtedly increase delinquencies on existing projects and the lease-up of recently constructed projects, but we’re confident that those with strong lender relationships and a long-standing record of high-quality resident service will weather the storm.