No different than the dotcom bubble or the swift unraveling of the housing bubble that led to the Great Recession, COVID-19 is wreaking havoc on the economy and on our daily lives.
No doubt most were awaiting the bull market to falter but COVID-19 presents a new challenge. While past events impact individual lives financially through job loss, layoffs and pay cuts, COVID-19 reaches beyond dollars and returns as human health and well-being are compromised. However, humanitarian care and relief are not exclusive; investors’ well-being are as much a priority as the residents in our apartment communities.
When investing passively in multifamily assets every limited partner (LP) signs the private placement memorandum (PPM). This document fully discloses the myriad of risks involved in the investment as well as the rewards.
After determining what to invest in, most LPs take considerable care in determining who they invest with. During these uncertain times, careful consideration is imperative to vetting any investment opportunities and their sponsors.
Operators who presented truly conservative business plans for their properties are positioned well to follow through for their investors. However, this does come with further conservative precautions.
As the country and world await the direction and toll of the pandemic, many operators are pausing scheduled distributions. This precautionary step prepares operators for the potential fallout of physical as well as economic vacancies. Maintaining a high level of liquidity is a protective hedge for investors against losing an entire asset.
It is important to note that implementing this precautionary measure should not diminish long-term returns. The funds are simply accruing in our operating accounts and awaiting further clarity on direction on the short- and longer-term economic effects of COVID 19.
Protecting Residents & Team Members
Despite the ability many have to work from home and those who can continue to work because they are “essential workers, the pandemic strikes at a time when 69% of adults have less than $1,000 in a savings account. Less than ideal to weather the shut downs taking place and financial uncertainty.
Currently the government is preparing a temporary stimulus package to support individuals and families. This funding is specifically designed to help people pay for essentials such as housing, water, electricity, …Time will soon tell if government measures will stave off COVID 19’s full impact to the economy.
While awaiting the details of the stimulus package, many multifamily operators are taking their own measures to support their residents. Such measures include waiving late fees and reducing or eliminating charges for amenities. Additionally, many operators are developing needs-based payment plans. Such plans include reduced or delayed payments. .
As we continue to guard against the spread of the virus, many apartment communities are implementing Center for Disease Control recommendations. These recommendations largely include social distancing. Practically, this means common areas such as club houses, fitness centers and pool areas are closed completely or available with limited capacity. The pandemic is also accelerating the trend toward virtual tours, online leasing and online payment systems.
Additionally, on-site offices are closed to walk-ins. Maintenance workers are taking on projects based on need to prevent contamination and wearing protective equipment including masks and Tyvek suits when in residents living space.
Planning for Uncertainty
Planning for an uncertain future can be difficult at best. As mentioned, operators are positioning properties with both a short and long term perspective. Looking ahead it is wise to watch for what takes place with both physical and economic vacancies.
These numbers are critical as they directly affect the ability to cash flow in the short term and sell the property for profit in the longer term. Potential investors and financing institutions alike need to see a steady trailing twelve months of profits and losses to be attracted to a deal and secure financing.
Operators planning on selling their properties in 2020 and through 2021 may find themselves holding assets longer than expected. Those holding properties in these times should be prepared to execute conservative business plans with heightened diligence and creativity on every front.
Preparing for Opportunity
As with all bear markets, those who find themselves overleveraged or unable to adjust to the new realities, will have to sell. This will create opportunity for experienced operators who follow a data-driven approach and employ sound underwriting and operational principles.
Despite the uncertainties that COVID-19 brings, there will be ample opportunities. Whatever role one plays, passive investor, resident or operator, the opportunity to work collectively and thrive is as unprecedented as these uncertain times. I look forward to finding the Win-Win-Win in this for all of us.