COVID19 puts apartment work on ice
Renters, any improvements planned for your apartment complex before the coronavirus could be on hold until well after the virus is under control.
That might not be such a bad thing with rents already on the rise in general. Any serious renovations at any given place usually mean a rent hike is coming in particular.
But whoever owns your complex, or someone who was looking to buy it with dollar signs in their eyes, may have figured something out: You might not be able to afford a rent increase — especially if you've lost your job or had to take a lesser-paying one.
“Value-add” investments are out. That's what apartment buyers call it when they buy low, put money into a property improving it, in order to justify raising rents.
Not even the pandemic could derail apartment investment sales last year, according to Mike Buhl, with Commercial Realty Resources Co. In his year-end market report, available at www.crrc. us, he said y'all paid your rent so devotedly, and employment came back so much (relatively speaking), and so few people got evicted or otherwise had to move, and interest rates stayed so low, that investors hardly batted a dollar-signed eye.
They just kept coming. But not so much for “valueadd” prospects.
“Even before the COVID-19 pandemic arrived, we were somewhat reserved on the value-add model, believing that not every tenant can pay higher rent and not every sale can have a value-add component,” Buhl wrote in the report. “There have been a lot of deals done that assumed a pace of rent growth that is now out of reach.”
High unemployment — recovered from the depths of the pandemic last April, but still higher than before COVID-19 — and probable stagnant wages — took the shine off of “value-add” deals, which usually involve apartment complexes that do need work.
Problem is, lots of apartment renters need work, too, despite some improvement in the economy.
“A lot of job losses were among people who were lower paid workers making it difficult to raise rents for an even larger demographic of tenants,” Buhl wrote.
Apartment buyers' “longstanding confidence” that
even modest property upgrades could yield higher rental rates is on hold, he said, for a year to 18 months or longer — until unemployment returns to pre-pandemic levels.
We have a ways to go. Oklahoma City had 2.9% unemployment last March, when the coronavirus hit. It ended the year at 4.8%, which is remarkable, considering. It was 14.7% in April. Now. it's 5.2%.
“Jobs in Oklahoma's energy industry likely will continue to be lost through
the beginning of 2021 and overall employment numbers may not rebound to pre-pandemic levels for the foreseeable future, if at all,” Buhl wrote, noting that energy was in the tank before the pandemic hit.
He added that, valueadd prospects aside, apartment investors in general have reasons for optimism.
“Investor confidence has not diminished, and I think that is because the pandemic was not created by something bad in the economy,” Buhl wrote. “This is not like the financial crises when people had a lot of bad debt and the structure of the economy was problematic. We don't have that now. The uncertainty for owners
and investors alike is the number of people unemployed and when they will come back to work.
“Not everyone will come back at the same time. Both sides are trying to figure out what that looks like and how long it will take. I think what we have learned is that each property is impacted differently by COVID19. Every property has its own history, story, tenants and outlook. So, investor confidence can be granular and case-bycase. It can be a mistake to generalize and misleading to look at the entire sector through a single lens.”