The lasting impacts of COVID-19 on residents, owners and operators.
When the first stay-at-home orders went into effect in the United States just as peak leasing season was kicking off this spring, apartment pros across the country worried that without the ability to physically show prospective residents available apartments in a one-on-one setting, leasing velocity would be severely impacted.
But a funny thing happened on the way to potential disaster during leasing season 2020: Prospective residents kept leasing apartments anyway through virtual leasing.
“When things started shutting down, the fear was, we’re not going to be able to rent apartments,” says Diane Batayeh, CEO of Southfield, Mich.-based third-party management company Village Green, which operates 41,000 apartment homes. “But last week was a record-breaking week for us, and our year-over-year numbers have been exceeding 2019. The pivot to virtual sales is something I believe will stick in the apartment industry.”
Yet the changes probably won’t stop there. For one thing, a desire for less density—i.e., fewer people around—could reverse the design trends of smaller apartments and larger amenity spaces, bringing back a flight to garden-style apartments in the suburbs, away from dense urban cores. Also, resident screening criteria and security deposits may ratchet up, as companies strive to pad out their cash flows and reserves to weather future outbreaks of the current virus or maybe an even more dangerous one. Other changes likely to stick around long after COVID-19 has faded range from pandemic insurance policy riders to residents’ do-it-yourself maintenance.
Virtual and Self-Tours: Here to Stay
On the tech front, the compulsory social distancing and virtual interaction that COVID-19 brought only propelled the long-developing trend of technological innovation and acceptance in the apartment industry. “Everything’s going digital,” says Carla Powell, Vice President at St. Louis-based 2B Residential, which manages more than 4,400 apartment homes. “COVID really accelerated that.”
One example: self-guided tours of apartments, where prospective residents are allowed to tour an apartment without a leasing agent. Although self-tours may be convenient for both customers and staff, they eliminate the one-on-one rapport-building that can help close a lease.
But at 2B Residential, Powell says leasing agents have been using apps like Google Hangouts and FaceTime to give prospective residents live, virtual tours as staff walk the apartments. They’ve now flipped the script, letting prospective residents physically visit the apartment alone, while the leasing agent tags along virtually via smartphone to field any questions, says Powell. This allows potential residents [for variation] to physically see a space—something many still want—while letting agents build customer relationships while social distancing.
As with Batayeh’s experience at Village Green using virtual tours to create year-over-year gains in her leasing numbers, 2B Residential’s strategy has paid off in residents signing leases without having to physically interact with staff.
Tech Rollouts: There’s No Going Back
The increased digitization of the apartment industry goes way beyond the sales office. The digital footprint at Chicago-based Draper and Kramer, a venerable, 125-year-old real estate company with 8,000 apartments, grew organically as the company did, which meant different websites for different apartment communities and varied systems for staff. But when executives suddenly had to start working out of their home basements, the digitalization initiatives that the company had in the wings soon took center stage.
“We basically took what was a several-year plan of updating and centralizing all of our online tools and websites, to serve both our prospects and leasing agents, and super-accelerated it,” says Jim Love, Vice President and Marketing and Brand. “I’ve never been so busy in my entire career, as I have been hunkered down here in my basement trying to keep up with the latest news from Dr. Fauci, and all of our efforts to bring our entire team onto one centralized platform.”
Of course, the energy Draper and Kramer and other real estate companies are putting into such centralized digital efforts won’t go away when COVID-19 does. “The adoption of technology is a one-way street,” says Brian Zrimsek, Industry Principal at Cleveland-based multifamily housing solutions provider MRI Software and former IT Vice President at the Irvine, Calif.-based Irvine Co. “You don’t start using it and then drop it later. I think we’ve all learned we can leverage technology more than we thought we could.”
Beyond virtual leasing, maintenance and preventative repairs will likely see lasting impacts as well. When COVID-19 first hit, to maintain social-distancing standards between residents and staff apartment managers were forced to prioritize service requests to respond only to emergencies such as leaks and stopped drains but not to less pressing problems. The result has been to empower residents to handle minor maintenance issues themselves.
At Village Green, Batayeh’s team has produced more than 25 do-it-yourself videos on its YouTube channel featuring instructions on everything from resetting a tripped GFCI outlet to replacing a refrigerator water filter, stopping a running toilet and even realigning a door.
“That probably reduced the buildup of work orders by about 15 percent,” says Batayeh. “If they needed a light bulb or a particular screw, we would tell them to reach out, and we would leave it by their front door.”
Even More Demand for Package-Handling Solutions
Package-handling solutions, which were already making big inroads into apartment communities where staff were inundated with deliveries, will almost certainly gain more traction. That’s because when the pandemic struck, many communities stopped handling packages altogether, right at a time when people were spending more time at home and deliveries were increasing. According to MRI, package handling dropped 70 percent across the million-plus units it tracks.
“Owners will need to address this issue by setting up package lockers and rooms that residents can access without staff assistance,” says Zrimsek. “You could also see retrofitting package delivery options into units themselves.”
In fact, Village Green is currently working with its developer clients that have apartment communities being built right now to ensure that the issue is addressed before plans are too far along. The company is providing input on how package rooms can be set up to ensure residents will be able to access packages on their own, Batayeh says.
Hand Sanitizer Galore
COVID-19 will leave other lasting impacts, including more rigorous—and visible—cleaning regimens by staff, to both protect residents and give them peace of mind.
“We’ve enhanced all of our cleaning protocols, and continue to modify our management of common areas and amenity spaces,” says Dana Caudell, President, Property Management, at the Wellington, Fla.-based Bainbridge Cos., which operates 20,000 apartments. “We want our residents to have a vibrant experience living at a Bainbridge community while continuing to exercise caution.”
The hand-sanitizing stations that operators scrambled to procure and deploy at the start of the outbreak will also remain at Village Green communities. “Sanitation stations are going to be everywhere,” Batayeh says.
Other changes at apartment communities will include increased spacing of common-area amenities, such as co-working area desks and exercise equipment in gyms. Signage will announce reduced capacity of anywhere from 25 to 75 percent. And many communities are already using electronic booking and reservation systems, as well as access control, to enforce the lower numbers in amenity areas.
2B Residential is limiting the number of people permitted in amenity spaces and has launched online reservations for the fitness center, says Vice President Jeff Hebrank. “Rethinking access control to amenities by removing 24/7 access might be in the future as well.”
Other permanent changes at apartment communities will be the materials chosen for finishes. Brass, bronze and copper are top choices for handles because of their natural antimicrobial properties, along with touchless solutions for doors and elevator buttons, and hard surface finishes that are easy to clean.
Changing Lease Language
Leases will likely also be redone to emphasize operators’ ability to shut down amenities for health and safety—an area that got some resident pushback during the pandemic. Language will specifically address the ramifications of a pandemic.
“Everyone needs to be prepared to answer, what’s your pandemic readiness plan?” says Ryan Shear, Managing Partner at Miami-based development firm PMG. “It used to be an afterthought, but now it’s a top priority, including for leases. Every contract you have with residents, lenders, contractors and insurers needs to be evaluated for pandemic impacts.”
More Understanding Apartment Operators
At the same time, operators may very well offer more flexible leasing terms, and be more understanding when residents need to break a lease.
“We’ve always tried to have a reasonable policy for breaking a lease, because people lose jobs, people get divorced, pandemics happen,” says 2B Residential Associate Vice President Mark Milford. Because of COVID-19, he adds, 2B believes more companies will adopt policies that let residents break their leases because they’ll need that assurance now.
In addition, Michael Lamantia, a CPA in the New York office of global accounting firm Mazars who works with a number of multifamily housing clients, says the goodwill that flexibility has engendered will also benefit owners in resident loyalty. “One of our clients provided $50,000 in rent relief to their residents in a 12-unit building,” he says. “Landlords are working with their tenants to try to get through this. I think you’ll see that goodwill pays dividends in residents wanting to stay at the property, because they know that owner cares about their well-being.”
At the same time, Lamantia foresees larger security deposits and stricter screening criteria for potential residents to help operators offset any future cash crunches, should there be another outbreak.
Lasting Alterations to Design
There may well be fundamental changes in building and community design. For example, the mantra of multifamily housing design in recent years of “sleep in the apartment, but live in the building” could resonate less with virus-wary residents.
“We normally see a lot of interest in dense apartment complexes with smaller units and lots of common-area amenities,” says 2B’s Powell. “But now we could see residents wanting less amenities and bigger, more-spread-out units with less shared common space.”
Indeed, operators have even been pondering whether the trend of dense, downtown urban living, perhaps the signature hallmark of the last apartment construction cycle, has finally played itself out. “I’m expecting a higher demand for suburban properties, as opposed to the urban ones,” says Batayeh. “What we’re seeing is that communal spaces and high density are making people uncomfortable. That is going to create an impact on demand.”
For some operators, it already has. Los Angeles-based multifamily housing investor and developer Cityview, which has generated more than $4 billion in urban investment across more than 100 projects, had routinely seen its studios generate the most demand at its apartment communities. Now “our studios have been much more challenging to rent and to lease up during the pandemic,” says CEO Sean Burton. “But our one- and two-bedrooms have been flying off the shelves to the point where we don’t have availability in those units anymore. Clearly people are spending a lot more time at home, and they want the extra space.”
An End to City Living? Not so fast!
Burton admits that product preference has changed among his prospective residents, but doesn’t put as much weight on the flight-to-the-suburbs scenario as many other apartment pros do. “I’ve heard some people say over the last few weeks that the city is dead and everybody’s going to move to the suburbs to be completely remote and apart from other people,” he says. “But that feels like an overreaction to me. We are fundamentally social animals.”
Burton points to predictions after the 9/11 attacks of New York’s demise, along with cities in general, based on the premise that people wouldn’t feel safe living in a target zone. But then came a major urbanization push in the apartment market, where residents preferred living downtown in areas with high walk scores rather than in the suburbs, where they would have to drive to amenities.
Instead of relocating to the suburbs, consumer preference may come down to design of buildings themselves, Burton says. “We think the mid-rise concept, where you can take the stairs and don’t have to get in an elevator with someone for 20 floors, may be a good middle ground. You can still be located in an urban area, but it’s a different proposition to live in a four-story building.”
High-rise living will be a harder sell in a post-COVID-19 world, Burton adds. “That kind of urban, high-rise lifestyle seems like it will be hardest hit. I think that will be the biggest change.”
Others see a return to spread-out construction types and designs that naturally limit the amount of interaction residents have with each other, and staff. “I think there’s going to be a big shift back towards vintage, garden-style apartments, because there’s more open space,” says Ari Rastegar, Founder and CEO of Austin, Texas-based developer Rastegar Property Co “There’s less interaction between tenants. You have more outdoor access, which allows more air circulation and less interior space. I think that’s going to be something that [will] be highly attractive.”
Higher Finance Hurdles
On the finance, deal and business side, operators are seeing more stringent requirements.
“At the beginning of the year, you would have to put 25 to 40 percent equity into a deal,” says Burton. “Now that’s closer to 40 to 50 percent.”
Underwriting numbers have shifted, too, says Village Green’s Beteyah. “The underwriting criteria on the operating side are more conservative. We were in an environment where you may have been able to project 3 to 4 percent rent increases. Now, it’s more like a 2 percent increase.”
Also, operators will likely want to build up larger war chests in case things go sideways again.
“I’ve always been a believer of cash reserves, where you can comfortably have two years of working capital to stave off any downturn,” Batayeh says. “Some people might say one year of reserves is good and healthy, and that might be true to survive. But I’m talking about thriving and taking advantage of opportunities that present themselves. More is better than less.”
At Bainbridge, Chief Operating Officer Kevin Keane says keeping a close eye on finances going forward is simply good business, both internally and with residents. “While managing the crisis at hand, you have to the long-term investment in mind,” he says. “Running regular cash flow analysis and developing criteria for alternative payment plans helps maintain goodwill with our residents. That’s key for our retention and referral strategy.”