Addressing New Challenges in the COVID-19 Era

Leaders in real estate have started to address the impact of the virus on their existing assets and future transactions, explains Marc Hershberg and Jared Isaac of Topaz Capital.

Marc Avi Hershberg  Photo courtesy of Topaz Capital Group LLC

With the escalating and rapid outbreak of the novel coronavirus, many businesses, communities and governments have been constantly receiving unpleasant surprises. While the immediate health of employees is the chief concern, leaders in real estate have started to address the impact of the virus on their existing assets and future transactions. Most have been diligently reviewing current community finances and trying to anticipate what to expect in the weeks and months to come.

So far, indications of transaction slowdowns, negative rent growth and cap-rate increases are raising concerns. Granted, transactional activity will likely be driven by opportunistic drivers if the market faces a more severe setback. Thus, we must take this “slowdown and period of uncertainty” to concentrate on asset and property management to address possible financial and operational hardships that the multifamily industry is enduring due to the adverse economic effects of the COVID-19 pandemic. 

The Department of Housing and Urban Development’s multifamily housing division encourages all owners to work with impacted residents and families to adjust rent payments, enter into forbearance agreements and lessen the impact on affected residents. At this time, no additional subsidy funding has been made available.

The package says that multifamily owners who were on time on their mortgage payments as of Feb. 1, but are now facing financial hardships due to the COVID-19 crisis, can seek temporary forbearance by submitting requests to their lenders.

However, there still remains tons of confusion and mixed messages being sent through the media, and property managers have been inundated with calls from residents who believe they are not required to pay rent in April, May and June. Most residents are aware that eviction proceedings have been suspended for the foreseeable future in some markets, which is the only means of addressing delinquent residents. Therefore, managers must work with the best available data and resources within the industry. In doing so, there is anticipation of a stark and rather painful reduction in receivables that could reach or exceed a 60 percent to 70 percent loss of ordinary monthly revenue. At a certain threshold, owners and operators will have losses beneath their debt coverage ratio for the mortgage alone.

National Apartment Association Senior Vice President of Government Affairs Greg Brown said that rental housing owners and operators will see consequences without rent being paid.

“The economic effects of COVID-19 are felt in all sectors of the rental housing industry, especially with rent and mortgage payments looming,” Brown said. “However, without rental revenue or further legislative relief measures, rental housing owners and operators will face significant financial consequences and our nation’s limited housing stock will be damaged. We encourage all residents to proactively work with their housing provider if they cannot pay, as we continue to work with Congress to address the needs of apartment residents, owners and operators.”

In conjunction with, and in preparation for, the anticipated loss of income, expenses should be addressed and means to reduce expenses and conserve funds for the uncertain months ahead should be taken.  It is imperative that owners and operators work with their lenders to get at least three months of P&I deferred, preferably rolled to the end of the loan term. This would ensure they are able to cover the normal operating expenses and continue to maintain the communities through this pandemic.

Jared Isaac  Photo courtesy of Topaz Capital Group LLC

These additional funds help ensure that upon conclusion of this crisis, they are in a financial position that allows them to promptly resume normal operations without a backlog of outstanding payables and deferred maintenance. It is recommended that each owner and operator make this a priority, it’s imperative to sustain the operational and financial integrity of your assets through this very challenging time. A reduced prospective tenant base is anticipated, so the priority is retaining existing residents. In order to keep residents, implement various measures such as advanced renewal options with no increases, payment plans spread across longer periods, etc.

COVID-19 has made a serious impact on lives, businesses and communities around the globe on an unprecedented scale. Fortunately, managers are in the unique position to provide clients with local and regional real-time market information to help navigate through these challenging times. 

Market performance at the upper end should weather the economic uncertainty better, given that most residents are in a better financial condition. Strong demand for workforce housing leading up to the current period should give this sector an ability to rapidly reach high occupancy levels again when jobs come back. Yet, of course, market performance and value are market-by-market and asset-by-asset, according to a report by CBRE Flash Call: COVID-19 Impact on Multifamily Real Estate.

There is a silver lining in all of this as the new challenges created by COVID-19 will undoubtedly change the landscape of the industry in the coming months. However, multifamily investment looks like it will stay strong through the turmoil. The multifamily sector is historically and fundamentally the safest and most stable asset class among all the others within the industry.

Multifamily, as an asset class, will remain resilient to the effects of the COVID-19 outbreak with its more stable, longer-term income profile and defensive investment characteristics, according to a report by JLL.

There will likely be many opportunities waiting on the other side of this storm for those investors with large balance sheets and liquidity.

Marc Avi Hershberg began his career working at UBS Financial Services managing client portfolios and debt placement in excess of $1 billion with affiliated banks, insurance pension funds, sovereign wealth funds, not-for-profit portfolios and private equity partners. While founding Topaz Capital, Hershberg worked as head of Originations and Asset Management at Brick Capital, a premier private equity and debt investment and lending firm.

Jared Isaac began his career working at growth stage companies. Alongside the founders, he developed the companies into thriving businesses. Isaac was involved with the financing, marketing and strategic planning of several companies in recent years. In June 2019, Isaac joined the Topaz team. 

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