In late May, we gathered together some of our colleagues to discuss the impact of COVID-19 on the Michigan and Ohio real estate markets. Matthew Lester, Founder & CEO, Princeton Enterprises; Rob Zelina, SVP Capital Markets, Lifestyles Communities; Chuck Lavezzi, COO, Monarch Investment and Management; and Dori Nolan, SVP, Client Services, Berkadia all contributed to an interesting conversation – you can listen to the complete webinar here—below are few key takeaways that have stayed with me.
Rent Collection Isn’t the Whole Story
Matt brought up a very interesting point about how percentage of revenue collection alone isn’t the best indicator of operational performance on the revenue side. We’ve been tracking percentage of rent collected as one of the primary metrics to help us understand the impact of COVID-19 and it’s an important metric, but it isn’t the whole story. COVID-19 is forcing operators to look deeper at cash flow, at revenue and expenses and other mitigating factors (stays on distributions, etc.) that have an impact on their performance that is not accounted for by rent collection.
This concept of digging deeper into the story isn’t limited to rent collections. At the onset of COVID-19, Berkadia’s Big Data team pivoted significant resources to developing new tools to help us understand the resiliency of the markets where our clients operate. We recognized that median income and employment numbers don’t tell the whole story when it comes to understanding how a market reacts. Our market resiliency reports dig into socioeconomic status and household composition of a target market to give a clearer picture of its ability to withstand challenges. The impact of COVID-19 has affirmed that broadening our data set to yield more insight gives us more a holistic view of an issue and drives better decision making.
Capital Wants to Move and it is Willing to Get Creative
There remains abundant capital, in excess well above $400 billion, on the sidelines that is eager for multifamily opportunities. In fact, some groups have remained active, like Monarch, who has continued to pursue select opportunities with a slightly more conservative approach. We’ll continue to see more interest in multifamily as investors from other sectors (hotel, retail, etc.) look for more stable environments to deploy capital. In conversations with institutional investors, Dori has been hearing that private equity investors are willing to move around in the capital stack to still be present in their target markets. Investors who may traditionally look for wholly owned acquirers or joint venture opportunities, are now considering preferred equity or mezzanine debt. We’re also keeping an eye on 1031 buyers, as the IRS extended identification period and closing time frame to offset some of the challenges with COVID-19.
As we see stay at home orders lifting and the economy start to open back up, we expect larger private owners to be the first movers on new opportunities.
Technological Enhancements are Here to Say
As stay at home orders started to take effect, we saw the industry quickly pivot to offering virtual tours for prospects, improving property websites to offer more functionality, diversifying payment methods and embracing apps that allow renters to better communicate. As Rob noted, many of these types of efforts have been underway, but COVID-19 has dramatically accelerated adoption across their communities and across the industry. The industry is seeing the benefits of embracing new technology and the potential it offers, and we expect these types of initiatives to continue as owner/operators look to continue to drive efficiency while maintaining a strong sense of community.
Today, we find ourselves in an environment that has changed significantly since even late May, with new challenges emerging in as a result of recent protests and unrest across the county. Our ability to adapt to these changes is what makes us resilient and the foundation of that is open communication and insight sharing. We look forward to continuing conversations like these and hope you’ll continue to join us.
-By Kevin Dillon, Senior Managing Director