COVID-19 – A Blessing in Disguise?
As soon I typed that title, I immediately felt internal resistance. Is that just insensitive? Is it too soon to even be having that sort of conversation???
It may be. Our nation, our world, our economy is in some real turmoil right now. And the last thing I want to do is pour fuel on the fire of pessimism, but the way I interpret the information I have consumed is simply that it is going to worse before it gets better.
Times are tough. Despite the physical health risks, we are all having to confront mental and emotional landmines as a result of COVID-19. Many of which we’ve never had to confront before.
I’m a fan of Brene Brown and for those of you who are unfamiliar, she is really the pioneer on research about vulnerability and authenticity. In a recent 60 Minutes interview she said (and I’m paraphrasing) that if we don’t name, and acknowledge our feelings, they will eat us alive.
For me it feels a bit disingenuous to not talk about what is going on in the world. I think we’re all grasping for straws at what this means for our health, our families, our work lives, our economy, and our investments. I’ve struggled with all those things myself.
I have good days and I have bad days. One thing I’ve noticed is as I am more focused on the good and the silver linings of this crazy Coronavirus situation I feel better and I’m more productive. So, I simply want to share some of my thoughts and mix in some multifamily real estate as well.
I cited a Napoleon Hill quote in a recent post, and it bears repeating.
“Every adversity, every failure, every heartache carries with it the seed of an equal or greater benefit.”
I still believe this is true.
Despite everything we’ve experienced in the last month, good has emerged. Life has taken on a slower pace, our cities are less polluted, there is more kindness and concern for each other, friends and families have reconnected, heroes have emerged from our medical communities and the list goes on…
I’m not blind to the stark reality that life is harder today than it was a month ago. There is no doubt about it. We are largely stuck in our homes, kids don’t have school, and the short-term economic outlook is bleak.
I’ve personally found it incredibly hard to get myself started in the morning. I want to be productive, but there is so much uncertainty in the marketplace it is hard to know exactly what is productive.
That leads me to a topic that isn’t directly related to multifamily real estate, but relevant just the same.
Focus on things we can control.
We can’t control if the tenant base of some of our investments work in the travel, restaurant or retail industries that have all but dried up for the time being.
We can’t control whether or not they lose their jobs.
And we can’t control whether or not they live paycheck to paycheck because if this is the case, they aren’t going to be able to pay rent. It is really out of our control.
There are a million things like that in our diverse and wonderful economy that just work 99% of the time. They are out of our control, but things come together and work very effectively the vast majority of the time.
It doesn’t do us any good to focus on the things we can’t control. And I will offer we’ll be much more mentally and emotionally sound if we do the hard work of shifting our focus to what we can control.
We can control how frequently we are meeting with our property managers. We can revisit and improve marketing campaigns. We can look at the type of tenant we are focusing our marketing on. No, we can’t discriminate, but we can tune up our marketing to certain types of tenants that are more able to weather economic turmoil.
We can explore incorporating Affordable or Section 8 tenants into our properties. Tenants with rent subsidies from the U.S. Government look rather appealing right now. Might be a good diversification strategy within your portfolio.
We can revisit our underwriting models and incorporate stress tests for “black swan” type events. We don’t know what the black swan events will be, or when they will happen, but we know they will come.
A lot of us in this industry have enjoyed a good long run of positive returns in the multifamily space. Multifamily has been lauded as “recession proof”. That has been an easy and sexy pill to swallow.
The mantra has been – Hey, times get tough, people lose their nice homes, they still need a place to live, so your apartment building will be that much fuller during difficult economic times.
Well virtually no one anticipated the whole real estate supply chain and economic system to shut down. It just wasn’t on our radar. And it really doesn’t look like people will lose their homes. The crisis is so widespread it is very hard to argue there will be many foreclosures. Judges are prohibiting and refusing to sign eviction notices. Forbearance plans are in place for mortgages, not to mention the government stimulus.
I don’t see people losing their homes or apartments because of COVID-19.
It looks like people are going to stay in their homes. Lenders and investors are simply not going to get paid for a while.
Who built that into their model? I’m not aware of anyone.
But what we can do moving forward is to plan for times of need. Agency lenders are now requiring a reserve account to be setup for any new loans that will ensure 6-18 months’ worth of mortgage payments including taxes and insurance are made. These funds will be held in escrow by the lender.
Multifamily investors that have held an operating reserve for their properties are much better suited to weather this storm and exit the property with a profit when the timing is right.
This is something we can control. We can all start underwriting to this and making it part of our business model. There is a lot of competition for equity investor capital in the multifamily space.
It isn’t hard to put together a pro forma with 3-5% annual rent gains, cap rate compression, and substantial interest only payment periods with the financing to show a nice 2x equity multiple on a 5-year hold that will get investors excited.
I’ll dare say that the syndicators that put together models with 10-14% returns, lower leveraged deals, and a healthy reserve account will really get some traction moving forward. The COVID-19 pandemic will leave a mark on our industry and it will change the way we underwrite.
I still love multifamily and believe it will continue as a great space to invest in. All I’m saying is we can control how we underwrite and how we asset manage. A more conservative approach is something we can control to get through these black swans.
Warren Buffet is credited with many catchy sayings. It’s really hard to argue with his success. He’s got two simple rules.
My point of this is really to remind myself that all is not lost. And to also provide in my own small way some words of encouragement. There are a lot of things outside of our control, probably more so than we have ever been aware of. And that can breed a feeling of helplessness. That feeling can crush motivation to stay productive and proactive.
It is so easy to get lost in the whirlwind of our daily business activities and what is required of us. So often a lot of the projects and initiatives we want to work on fall by the wayside. Now may be one of the best singular opportunities of our lives to take a deep breath. Take a step back, look at what is truly important and meaningful to our lives, and start working on those things.
We don’t need to drown ourselves in Netflix for the next couple of months – although an episode or two of Tiger King may be exactly what we need to give ourselves a break – let’s re-tune and prepare for the opportunities that lie on the horizon. They may be faint, but they are most certainly there.
God Bless and Be Well!