What COVID-19 Might Mean for the Multifamily Sector

The COVID-19 pandemic has had a dramatic impact on almost every industry, including real estate. Owners, investors and developers already are seeing ripple effects across sectors. This article looks at how the virus might bring changes to multifamily housing that could endure into — or at least heavily influence — the future. A short sidebar covers how technology can power cost cutting.

The current environment

Rent collections on multifamily properties largely remained stable throughout 2020, in part due to federal economic stimulus funding. If 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. The pandemic has made people wary of leaving their homes, viewing properties and moving into homes that may not be as clean as they’d like. In some areas, prices on new leases have declined from the prior year, though, and a few landlords have resorted to inducements to entice renewals and new leases, reducing the profits.

Not surprisingly in this climate, many multifamily property investors are exercising caution, and buyers are seeking discounts. But, thanks to sellers being better capitalized than they were in 2008, few buyers are finding the far below market value pricing that occurred during the Great Recession.

Shifting priorities

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 couldn’t use due to pandemic restrictions, and now they’re eliminating the fees altogether. They’re 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’s 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.

Location matters. Location obviously plays a major role in convenience, but the optimal location for future construction also will need to consider how the likely lingering jump in remote work will affect where people want to live. It’s 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.

Healthy construction. Some developers are betting that the heightened interest in safety and sanitation will continue after COVID-19 has passed. In light of this, they’re incorporating features such as touch-free technologies in common areas.

They’re also using antimicrobial materials like copper. And they’re paying greater attention to HVAC and how it affects the spread of pathogens.

Think ahead

One thing is certain: COVID-19 has changed the landscape. Those who wait for a return to “normal” will likely fall farther and farther behind their competitors.

Sidebar: Technology powers cost cutting

High unemployment rates, declining collections and eviction moratoriums threaten some significant hits to budgets. While it’s 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.

Technology, for example, can both 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.

For help reviewing your financials, please contact Nick Sarinelli, CPA, CFE or Doug Collins, CPA on (973)-298-8500. Visit our real estate services page for more information. You can find the most recent tax and stimulus updates on our COVID-19 Resource Center.