Q2 2020 Updates and the the Multifamily Market Outlook

The pandemic’s effect on the economy is very different than the 2008 financial crisis. The impact has been greater (in the short term) than most previous economic crises, but it has the potential to resolve much faster because the root cause is different. The 2008 crash was caused by high leverage and low mortgage standards in the single-family housing industry. This filtered through local economies in different ways but led to an overall reset of asset values. This time, there are still some saddled with high leverage, but the phenomenon isn’t close to the levels of 2008 as there are some very strict banking regulations now in place to prevent a financial crisis like 2008 reoccurring.

The US government has done a lot to address the economic impact through the Cares Act and an injection of $2 trillion into the economy. The highlights as it relates to the apartment industry are the following:

  1. Checks for Individuals: Each individual who earns ~$75K/year will receive a $1,200 check from the government. Couples with incomes of ~$150K/year will receive $2,400. In addition, they will receive $500 per child if the child is under 17 years old. The direct benefits phase out up to $99K/year for individuals and $198K/year for couples.
  2. Unemployment Income: The definition of unemployment has been broadened to include contract workers and others who are unable to show significant work history. On top the traditional unemployment benefits, individuals claiming unemployment benefits will also receive $600 per week of additional income for up to 4 months. In theory, this will return income to regular levels for many individuals.
  3. Forbearance: Lenders are working with borrowers to defer mortgage payments. The government agencies (HUD, Fannie Mae, and Freddie Mac) have clear guidelines on entering forbearance, and other lenders (life insurance companies, local banks, etc) are also working with their borrowers. The lenders that may not have the flexibility to work with borrowers are CMBS (collateralized mortgage-backed securities) and debt funds. We expect opportunities to arise as borrowers begin to struggle stay current on interest expenses and are forced to sell.
  4. SBA Loans: The government is offering up to $10M for small businesses, to help with cash flow and enable them to keep their employees on the payroll. If you’re considered a small business (less than 500 employees), we recommend that you take advantage of these programs.

How Are We Responding to the Pandemic?

We believe it’s our duty to our residents, employees and partners to do our best to make sure everyone’s needs are met.

For our residents, we are working to soften the economic impact by waiving late fees, holding off on evictions, reducing fees, and holding off on sending outstanding balances to collections/credit agencies. Residents who are unable to pay in full can work out a payment plan with management by making an initial payment and paying the remaining rent through the month.

For our employees, we are grateful for their tireless efforts and preparation around this crisis. All who can are working from their homes. However, much of our work does not allow working from home. These devoted employees are not only managing their children but are working extra hours to ensure that the properties are well-maintained and kept to the highest standards. We are in constant communication with all of our devoted staff and will celebrate their commitment to Barvin after this all passes.

For our investors, we are working to ensure that there is no long-term economic impact to their investment. We are postponed distributions in order to ensure a significant cash position at all properties, and we’ll supplement this with internal funds if necessary. Our organization is springing into action.

Over the past few years, we’ve been extremely cautious in our acquisition and investment decisions. Watching other groups make uneconomical offers caused us great concern and to transition from being a buyer to a seller of multifamily properties. We were fortunate to have completed the sale of 2 out of the 5 properties we had slated for sale before COVID-19began. The remaining 3 projects are ready to be launched as soon as the pandemic is over.

Fortunately, there is still significant demographic demand for housing in our markets. We are optimistic that this pandemic will lead to opportunity (multifamily is still projected by CBRE to be the asset class of the 2020s) as some overleveraged properties might falter. We view this as a time to have a positive impact on our residents’ lives, strengthen our communities, empower our team members, and show our partners how to respond in times of crisis.

What Is Happening at Barvin?

The apartment business has pros and cons in times like these. The obvious pro is that people still need a place to live. Things like hotels and shopping malls come second to their primary need for a residence. Therefore, apartments will be less affected and one of the quickest asset classes to rebound in the recovery.

The con side of apartments is that every tenant at each property needs to be treated equally, due to Fair Housing. It’s unlike a retail project, where you can make one deal with tenant A and a very different deal with tenant B.

We are reaching out to our residents and asking them to complete an application if they’ve been affected by the pandemic. They are required to show us some proof of a drop in their income (unemployment filing, work release, etc.) and sign the document. Our goal is to keep residents in their apartments and maintain occupancy at all of our communities. Residents who have a COVID-19 hardship will be offered creative payment plans, the acceptance of partial payments, waiving of late fees, and pausing customary eviction filings.

We’re fortunate that our properties already have the resources in place to support social distancing. Each property has professionally produced video tours for every floorplan on the property website, which has allowed us to continue leasing during this period. In addition, we are completely paperless, so residents can sign all forms or applications electronically, and have several options for submitting online rent payment. These are small things that have helped smooth this process tremendously.

In the upcoming week, we’ll send property-specific updates to all of our investors, based on collections from the week of April 1-4 when rent is due. We will compare this month’s performance to prior periods and share the results of one of the many stress tests we ran. We performed a break-even analysis to determine how much of a decrease in revenue each property can sustain while still being able to service debt and pay for necessary capital repairs.

We also ran additional scenarios where properties do not release upcoming lease expirations. What we are seeing so far, though, is that the percentage of renewals is increasing rather than dropping, and that anyone who has lost their job or had a decrease in income is eager to stay in place rather than move.

These times are affecting assets in an unequal manner. For instance, we own a few Class A properties that will experience very little impact, because the tenants are salaried employees. On the other hand, we also own Class C properties that we purchased in 2012 for pennies on the dollar. Even though our basis remains low, the impact will likely be felt harder here, because the renters have less bandwidth to absorb obstacles thrown in their way.

We do not believe that this pandemic will have a lasting impact on our properties or their valuations. As the economy recovers, so will operations at our properties.