Operating Multifamily Apartments through COVID-19
Ownership operations have never been more important than right now. Over the next couple of months, the decisions that you, as an owner, make will determine the fate of your property. So it begs the question, what are the right decisions?
Operations has always been an important element to a property's success. After all, it is the actual NOI (net operating income) and area Cap Rates that dictate the property's value. Thus, efficient operations, as measured through an increase in income and/or a decrease of expenses, has an exponential effect to the valuation. Over the past decade, I think most owners would agree that was the goal of their business plan.
The Coronavirus, also known as COVID-19, has come in, ironically, like a bat out of hell promising to have a huge hit on multiple business sectors, especially in multifamily housing. This pandemic will be challenging every owner's capability to operate a property effectively, forcing us to shift our focus from creating value, to creative thinking.
I know this first hand as I was in best and final on two properties during the early stages of COVID-19. Fortunately for me, I used to work for GlaxoSmithKline in the Vaccine Department as the Director of Global Project Management. I was actually working there during H1-N1 (Swine Flu), and was considered essential personal. I am also very familiar with the vaccine trial process, inclusive of the timeline for compassionate use indications. This information helped me handle the two offers I had in best and final, and it is helping me make decisions on how I manage my property through this pandemic.
For the properties I had in best and final, I approached both brokers in advance of them meeting with the sellers, to let them know that if we were to be awarded the properties, the LOIs would need to be extended for the unforeseeable future. While you may be reading this thinking this is a no brainer, I approached them three weeks ago to let them know of this situation, prior to COVID-19 being what it is today. Both brokers were obviously not well versed in pandemics, nor did they understand the severity of what we would be facing in the coming weeks. I then took the next thirty minutes to explain the challenges that not only I would face, should I be awarded the property, but anyone for that matter. I pointed out the feasibility of performing the due diligence by myself and the vendors, let alone the tenant's risk of us entering the property (also not permissible per the state's lease). I also highlighted the challenges to executing the financing requirements (surveys, appraisals, etc.). After this lengthy discussion I felt confident that the brokers knew this was not a problem specific to me as the buyer, but any non-cash, non contingency buyer. Both brokers followed-up with me after they discussed with their respective sellers, and one seller said they would pursue another buyer (since then has come back and said they still want to work with me), and the other is putting off making a decision, but was very grateful for my insight.
This insight into the pandemic world has not only served me well with acquisitions, it is also very helpful for operating the property I have currently. The most important bit of actionable advice I can give is to monitor the virus onset and spread within the property's MSA. This single fact alone will tell you more than anything else on how to make decisions. COVID-19 will, I repeat will, impact every major city in the US; it is not a matter of if, it is a matter of when. If your city is one of the lucky cities that has yet to have a case, you still have some more time to prepare. If your city has had its first case, start to watch how quickly the virus spreads. As every city, and state is issuing its own regulations on shelter-at-home, etc., the rate of the virus impact can tell you how compliant local people are and thus how seriously they are taking the directive.
On most large multifamily properties, there are several community amenities (pool, laundry room, game room, business center, leasing office, gym, movie room, etc.). All of these spaces need to be closed immediately. The leasing office is the only exception to this advice, however, access must remain limited. As the leasing office serves several purposes, a workaround strategy must be implemented for each.
Like everyone in the world, your tenants are going to be facing challenging days ahead in the next couple of months. Communicating with them frequently with helpful information about the property, COVID-19 literature, and information on government assistant programs will provide some comfort to them. As challenges arise on the property, whether it is a maintenance issue or an ability to pay, these situations need to be addressed on a case-by-case basis.
The ability to pay is not only a threat to your tenant, but also you. Most owners are concerned about how they are going to pay their mortgage if tenants have challenges paying their rent. While mortgages are most properties' largest expense, it is more likely there will be difficulty paying other bills first. It is important to have conversations and identify solutions across all reoccurring expenses, no matter the size of the expense.
There is a high likelihood that new leases will become very challenging for properties across the country, as the feasibility of moving will be borderline impossible. Adding to this challenge is the ability to view an apartment. Leveraging today's technology by implementing creative solutions for a prospective tenant to still be able to view the property, may provide an opportunity to capture a few new leases.
Importance of Operations
When I got into operating multifamily properties a few years ago, I was amazed at the number of seasoned owners who did not truly understand how to operate an apartment. These owners were blessed with the rising tide of multifamily, where even operating poorly paid out pretty handsomely. It was also evident that many relied heavily on the property management team to execute the business plan, and thus the operations. Let me be clear it is impossible for a property management team to be both the property management company and the asset manager. I know this because there is a tremendous amount of work to do as a property manager, just like there is for an asset manager. I have always believed, and thus why I have dedicated hundreds of hours, that a property during a turbulent time will have its best chance of survival only when a solid property manager and asset manager are working together to succeed. I have prepared for this exact situation for a few years. I may not know what lies ahead for my property, but I do know that by focusing on operations, with the support of my property management team, I have positioned it on the best path to succeed.