UBS’ Jonathan Woloshin on Americans Prioritizing Rent
With rental collections exceeding 90 percent three weeks into May, the questions everyone is asking are: How long will this trend last and what’s next for the multifamily market?”
With a few more days to go, rental collection in the month of May has been very high, amid rising unemployment and health concerns. This is set to ease the pressure for multifamily owners and investors—at least in the short term.
Jonathan Woloshin, head of U.S. real estate for UBS Global Wealth Management’s Chief Investment Office, highlighted in a recent report that multifamily market fundamentals are expected to remain stable for the long term, despite challenges resulting from the coronavirus crisis.
One of the biggest challenges, however, remains residents’ ability and willingness to pay rent. In the interview below, Woloshin discusses his expectations for the point when federal unemployment benefits expire at the end of July.
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Contrary to general expectations, May rent collections started slightly better than April, even with unemployment numbers continuing to spike significantly. How do you explain this?
Woloshin: So far, May rent collections are running ahead of April, although the month is not over yet. I believe it is explainable by several factors including:
• the direct funds from the CARES Act.
• the significant increase in unemployment benefits that the federal government added to state-level benefits.
• the willingness of landlords to work out payment plans with renters who have demonstrated their hardship arising from COVID-19.
• the desire for tenants to maintain good standing with their landlord and credit ratings.
Woloshin: The longer the lockdown is in place, the greater the risk of nonpayment. The federal unemployment benefits expire at the end of July. In addition, several states have extended eviction moratoriums, and California is debating a bill that would allow tenants to have a year to pay their rent with no penalties or eviction. The longer this crisis goes on, the more political pressure there will be at the state and local levels to protect tenants. In addition, the growing calls for rent strikes cannot be ignored.
Do you see different dynamics in rent collections for Class A assets compared to B and C?
Woloshin: This has varied by region and type of landlord. Some landlords have said that urban, Class A assets in cities with higher-wage salaried employees have witnessed better rent collection than suburban B/C garden-style assets that cater more towards hourly workers. Some regions that have a higher proportion of hourly service workers with a greater proportion of renter-by-necessity tenants have seen higher levels of stress. Other landlords have indicated no difference between urban/suburban and Class A versus B/C. In short, the data, so far, is inconsistent.
There has been some regional stress on areas that are more heavily focused on tourism/retail with a higher proportion of hourly, service-oriented workers. Again, the data is inconsistent as it is still fairly early in the lockdown.
What trends do you see accelerating or emerging this year when it comes to multifamily lending and distressed debt?
Woloshin: Lending for quality properties is still available. Underwriting standards have tightened—for example, debt service coverage ratio and loan-to-value—and there is a greater focus on the quality of cash flows. There is also more of a focus on working with existing relationships as opposed to expanding to new borrowers.
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Construction financing has certainly tightened as it is more difficult to underwrite what cash flows will be 18 to 24 months out. There appears to be some construction lending that is occurring at the regional and local bank level, particularly to long-standing clients.
Invariably, there will be some distressed assets. Given the plethora of capital sitting on the sidelines, as well as the copious amounts of distressed debt capital being raised, we believe there will be ample demand for distressed multifamily assets, given that it is a relatively steady and durable asset class.
What should we know about capital markets?
Woloshin: The capital markets have generally been pretty favorable to REITs. There have been a number of overnight equity deals across the REIT sector that have been oversubscribed. In addition, the unsecured debt market has seen several well-subscribed deals for investment-grade quality REITs, and spreads have compressed somewhat over the past several weeks. As long as the Federal Reserve continues to be accommodative, we believe the capital markets will remain open, particularly to higher-quality companies.
What lessons has this pandemic taught you so far?
Woloshin: The pandemic should reinforce the following: Quality matters—quality of cash flow, quality of capital structure, quality of location, quality of management, quality of lending and equity relationships.
Three things have never gone out of style in my career and they are good lessons to reinforce: free cash flow, risk-adjusted return and underwriting. Underwriting assumptions must be reasonable or your odds of success are significantly diminished. Free cash flow is all you have to pay debt service, make capital expenditures and pay dividends. Your projected returns have to compensate you for the level of risk that one is taking.
It is easy to deploy capital when everything is rosy. The truly successful are the ones that underwrite properly, employ appropriate levels of leverage, maintain good relationships with their capital providers and focus on what is to come, not what has been.