The industry’s second-quarter dip could lead to increased deal activity by year-end.
For Dan Wurtzel, the lives of his residents were literally hanging in the balance. As President of FirstService Residential New York, which manages some 20,000 rental apartments and 50,000 co-op and condo units throughout New York City, Wurtzel was responsible for coordinating the firm’s front-line response to COVID-19, right at the epicenter of the pandemic’s outbreak in the United States.
Part of the challenge was the speed with which the virus spread throughout New York, the most densely populated metropolitan area in the country. At first, “it took a while for people to take [it] seriously,” Wurtzel says. “Then, when we started to see the numbers go through the roof in terms of confirmed cases, ICU patients and the number of people dying, it became real. We had to adapt very quickly.”
At FirstService communities, that meant closing common-area amenities, transitioning office staff to working remotely, and ensuring that other personnel were still available onsite to continue to meet residents’ needs.
With past experiences ranging from 9/11 and Superstorm Sandy to blizzards and blackouts, FirstService was able to leverage its investments in technology, from its property management systems to its resident portals, to stay on track. Having that technology helped staff rapidly transition to working offsite.
“Our technology has become more robust over the years, and it really allowed us to basically stay in business, without being in the office,” Wurtzel says. “Running Zoom calls with our co-op boards or using web-based accounting systems means all those tools are accessible to anyone who has a computer and Internet connection.” It has also helped the company reach out to residents and keep them updated on the latest developments, while maintaining social distancing.
FirstService’s early actions at the epicenter of the novel coronavirus outbreak are emblematic of the quick, often disruptive, but necessary, steps apartment firms all over the country have taken. As infections swept over the U.S. this spring, apartment operators scrambled to serve 40 million residents who were suddenly home 24 hours a day, seven days a week, with little information about what lay ahead and no clear end in sight.
Even now, operators continue to grapple with the ongoing impacts of COVID-19, which are sure to last well into the third and fourth quarters of this year, if not longer.
Communication Is Crucial
Key to it all for apartment operators has been maintaining open, clear communications with residents to help them through the crisis, including information on Centers for Disease Control and Prevention (CDC) guidelines, social distancing and personal hygiene.
“The number-one tool we have with our residents is communication,” says Wurtzel.
On Monday, February 3, Miami-based Vie Management, an operator of 5,843 beds across nine student housing properties, sent out a staff memo about the potential threat of a virus that had originated in China. The memo hit inboxes the day after the Kansas City Chiefs defeated the San Francisco 49ers in Super Bowl LIV, when terms like “COVID-19” and “social distancing” were still unfamiliar to most Americans.
“We take the health and safety of our team members and their families seriously,” read the message from Ari Rosenblum, Vie Co-founder and CEO. “We are closely monitoring the coronavirus situation.”
The memo highlighted the declaration of a public health emergency by U.S. Health and Human Services Secretary Alex Azar three days earlier. It emphasized the potential of asymptomatic transmission of the virus in the U.S. It also advised Vie employees to wash their hands frequently, to avoid touching their faces and, above all, to stay home from work if they were feeling ill.
In addition, the memo identified the five domestic airports where arrivals from Wuhan, China, the first flashpoint for the virus, were being rerouted for health screenings, and asked employees to refrain from traveling “until further notice.” In closing, it promised to provide staff with updates as they became available.
Vie’s memo, which was full of commonsense tips to fight the spread of the novel coronavirus that have now been drilled into our collective conscience, came a full five weeks before New York state established a containment zone on March 10, and nearly seven weeks before California Gov. Gavin Newsom issued the country’s first state-wide shelter-in-place order on March 19.
Vie’s early response allowed the company to stock up on much-needed personal protective equipment (PPE) for its staff, from hand sanitizer to face masks to gloves, long before nationwide shortages for those items emerged.
“We saw what was going on in China, and we very quickly realized that we needed to get out ahead of what we saw coming,” Rosenblum now says.
The company followed up the staff memo with a letter to its residents on March 3, when many people were still downplaying the threat of the virus in the U.S. “A lot of [residents] thought we were a little wacky at that time,” says Rosenblum. “But we kept talking about it right up through March, at which point they started thinking we were a little bit less wacky.”
During this highly fluid time period, information and guidance changed daily, if not hourly. “It was not the time for being indecisive or not communicating,” says Kurt M. Westfield, CEO of Tampa, Fla.-based WC Equity Group, an operator of 400 apartment homes.
Dana Caudell, President of Property Management for the Wellington, Fla.-based Bainbridge Cos., which operates 20,000 apartments, agrees. “The biggest, most crucial part of this has just been the constant communication with the residents, as well as the employees,” she says. “We wanted to empower them to protect themselves.”
For apartment managers, keeping the information flowing seemed the best—perhaps only—way to help allay the burgeoning fear for residents stuck at home and watching the alarming news of the dangerous, highly contagious virus.
“Everyone is scared right now,” Tony Subraj, Vice President at New York-based Zara Realty Holding Corp., which manages 4,000 apartment homes, said at the beginning of April. “Everyone is on pins and needles, and we’re trying to ease and calm their fears by talking to our tenants and telling them the steps they can take to help and protect themselves. We’re also just here to listen, and be a supporting ear if they need it.”
Shutting Things Down
Beyond increasing their communication, many operators also immediately shut down common-area amenities, especially places like pools and gyms, where residents could come in close contact with one another, and where the virus could reside on surfaces.
“We are strictly following the CDC-recommended guidelines and shelter-in-place protocol, and have therefore closed all shared amenities until further notice,” wrote Gina Fortune-Harmon, Vice President of Market Rate, at the 23,000-apartment, Chicago-based Habitat Co., in an email to residents in mid-April. “This includes fitness centers, resident lounges, demonstration kitchens, rooftop decks, and business centers.”
For many apartment operators, the scramble to take those steps, while isolating staff from one another and from residents, quickly became an all-consuming task.
“It was 15-hour days, trying to get our policies and procedures in place,” says Caudell. That included isolating employees in leasing offices, where they interacted with residents by phone or electronically. “But then the next day, something else would happen or something would change, and you’d have to revisit everything all over again.”
Addressing Rent Refunds for Unavailable Amenities
Not surprisingly, shutting down common-area amenities was also one of the first areas of friction between operators and antsy residents now stuck at home. Industry message boards quickly filled up with onsite staff postings about residents asking for discounts on their rent because their amenities were no longer available.
At Bainbridge, Caudell says her residents for the most part understood the reason behind amenity closures: Public safety and stopping the spread of the virus. But she adds that a good lease should spell out that amenity use isn’t included in the rent to begin with.
“When we first [closed amenities], internally we were worried that we were taking something away,” says Caudell. “But our leases are pretty clear that you’re not paying rent for amenity use. That’s not what rent is for. So we just tried to go back to the safety aspect, and why we didn't want anyone gathering in any common area or amenity space during this pandemic.”
Some apartment operators have suggested emphasizing amenity use as “complimentary” for residents in future leases, but for operators who charge amenity fees in addition to rent, the path ahead isn’t as clear—one more surprise challenge for apartment operations sparked by COVID-19.
Keeping Up with Repairs
On the maintenance front, by the spring, apartment community staff were suddenly restricted to only doing emergency repairs inside apartments, as well as carrying out hour-by-hour, full-building cleanings, including wiping down elevator buttons and stairway railings.
“There’s been a shift to sanitizing the buildings multiple times a day, seven days a week,” says Zara’s Subraj. “We just keep doing that, over and over, to keep our guys employed. We haven’t had to lay anyone off.”
For routine maintenance items, such as filter or battery changes, operators began asking residents to perform those tasks themselves. “We typically do smoke detectors and filters for them,” Caudell says. “But now, we’re just leaving batteries and air filters outside their doors and communicating that to them.”
At Vie, Rosenblum leveraged video conferencing to encourage his YouTube-generation student residents to learn do-it-yourself skills. “We’re using Skype or Zoom or Houseparty or whatever the chosen app is,” he says. “They can talk with a maintenance teammate who can show them, if it’s an issue like a light bulb, for example, what they can do to fix it themselves.”
Habitat is logging noncritical maintenance requests for future service, while prioritizing the safety of staff and residents regarding jobs that just can’t wait. “For team members who are going into residents’ homes, we’re being as careful as possible for both the sake of maintenance staff and those occupying the unit being serviced,” Habitat’s Fortune-Harmon says.
When immediate, in-apartment repairs are needed for HVAC or plumbing issues, many operators have followed the same protocol: Communicating with residents beforehand to ask them to wipe down the area where work will be done, and to keep away from workers while they’re in the apartment by going to another room, if possible. Firms have also outfitted workers with PPE—when they could get it.
“We’ve equipped all of our guys with sanitizer, and they also have masks and gloves and shoe coverings,” Subraj says. “They’re sanitizing and wiping things down before they go into the apartment, and sanitizing when they come out, too.”
One frequent best practice for operators is to have maintenance staff make sure that residents see them put on a new pair of gloves, and then see them dispose of those gloves immediately upon leaving the apartment to give them peace of mind that PPE isn’t being reused.
Meanwhile, the blocking and tackling of property management couldn’t simply grind to a halt just because everything else did. The pandemic may have hit smack at the height of apartment operators’ busiest time of the year, yet turnover was still happening. Leases were expiring, and new ones were getting signed.
“People are still moving,” says FirstService’s Wurtzel. “We had 18 move-ins in March, some of them even toward the end of the month.”
To support those new leases, the industry turned, almost overnight, to virtual-tour technologies that had already been on the upswing in multifamily. “Before the COVID-19 pandemic, only 5 percent of our leasing traffic was sight unseen or done by virtual tour,” says Aaron Galvin, President of multifamily broker Luxury Living Chicago Realty. “With the current crisis, owners are keeping rents flat and new lease velocity is at 50 percent of projections.”
But in terms of business, the news is not all bad. For instance, on the deal-making side, operators say many in-process transactions have been waylaid. On the other hand, that halt in activity should lead to pent-up demand and then sales opportunity toward the end of the year.
“Our acquisitions and dispositions have been basically put on hold with the capital markets,” Caudell says. “But I have a really good feeling about the end of third quarter and the fourth quarter, especially for those funds who have to outlay cash by year’s end. We may see a plethora of properties going on the market and a lot of fast sales and acquisitions. That’s something I'm keeping an eye out for.”
Indeed, depending on the timing of a deal, COVID-19’s impacts could lead to forced sales down the road.
“If you were looking to buy a project that’s in lease-up, or someone just finished building it, lease-up or construction financing has kind of dried up,” says Brad Dillman, Chief Economist at Atlanta-based Cortland, which runs 60,000 apartment homes. “So some of these builders are in a tough spot. They’re going to have a lot of work to do to get their current situation extended.”
Given the current environment, and the uncertainty of when the country will get back to “normal”—whatever that may look like—apartment firms in the second quarter were also just starting to get a handle on how things might shake out later this year, while reaching out to investors and lenders now for possible alternative plans later.
“Our finance team has been extremely busy,” Caudell says. “There’s a lot of cash flow analysis that we've been working through, trying to determine what type of cash reserves we have on hand. If we get six months down the road, and we only have 80 percent of our rents coming in, what does that look like? It’s still a very fluid situation right now.”
On balance, operators say their finance partners have been willing to talk about alternative payment plans, deferments and forbearances, as long as owners are transparent about their situations.
For Vie’s Rosenblum, who had the foresight to start planning for the fallout from the current crisis at the beginning of February, that means planning for the realities of the second half of 2020 now. “We’ve had some preliminary phone calls and e-mails with lenders to just let them know, hey, we’re still here, and here’s what we’re doing,” Rosenblum says. “We’ve found extremely responsive partners on the other end of the phone or email, because we’re all trying to beat this thing together.”
While that esprit de corps has been palpable in the apartment industry among residents, operators and financiers who got past the initial hurdles of the pandemic of 2020, others caution that we may not be out of the woods yet. “I think what a lot of people are overlooking now, or only talking about from a high level, is a second flare-up of the virus later this year,” says Dillman. “I don't think people are thinking about what that means for the labor economy, or what that means for how the government will respond to it. That, to me, is a much bigger issue.”
For apartment operators and residents, it was just one more unknown in a new reality, at least temporarily, for the industry—and for the country.