THE IMPACT OF COVID-19 ON MULTIFAMILY REAL ESTATE
Dear Arcan Investors, Partners and Friends,
Earlier this month, life as we know it changed immeasurably. The worldwide spread of COVID-19 and its full effect on our nation and the world remains uncertain, as does its effect on our business. As the principals of Arcan Capital, we wanted to take this time to discuss the current situation and the steps we are taking to confront these new challenges with our investors, partners and friends. Arcan Capital’s mission is: create exceptional returns for investors by providing exceptional homes for residents. Now, more than ever, we take that mission seriously as the pandemic creates uncertainty for our investors and makes homes, our residents’ private refuge, even more valuable than ever.
As the virus made its way into our markets, we quickly adjusted our operations. As a manager of people’s homes, however, we cannot simply close-up shop as some other firms are doing. Prior to the recent CDC guidance, we had already begun planning for how to best respect social distancing while also maintaining our day-to-day operations. We now require residents, staff and vendors to communicate virtually whenever possible. Work orders and payments can be submitted online and unit tours can be done without a single in-person interaction. These online systems were already in place and were once viewed as a trendy modern amenity; now they keep our business fully functional.
We are adjusting our collections methods to make it even easier for people to pay rent online without person-to-person interaction. We are also adjusting our renewal process, making it easier for current tenants to renew leases and stay in their homes. The President recently announced his recommendation to suspend evictions and foreclosures through the end of April. Many of the markets in which we operate had already taken this step. We anticipate that these delays could last even longer as people get back on their feet and local governments remain reluctant to remove tenants due to non-payment. This is our greatest exposure and it has the potential to make the enforcement of collections difficult. We are responding by finding creative ways to incentivize and work with our residents like we never have before. Heading into the next few weeks, our goal is to maintain and increase occupancy and avoid move-outs whenever we can. In this regard, we are closely monitoring rental rates and conditions in every submarket and we are making quick decisions about whether and how much to adjust rates.
Despite the economic impact from COVID-19, our long-term belief in real estate investing is unchanged. Real estate has been and remains a great investment. One of the many reasons we prefer it over other assets is the tangible nature of the investment. While equities and fixed income investments are viewed on a screen, ownership of apartment properties includes the literal dirt and everything permanently affixed to it. You can see it and touch it. We remind ourselves that each piece of real estate is, by definition, unique. When the financial markets fluctuate, we are secure in knowing that we own land and buildings that are people’s homes. As the population continues to grow, and as the meaning of home becomes even more important, we believe that our investments will remain stable assets that generate positive cash flow over the long-term. Historically, multifamily real estate has been a great asset to own in turbulent economic times and we think it will be now as well.
As uncertain as the near-term future may be, we want to remind everyone of the ability of the United States to bounce back. It was only 12 years ago that we feared the entire system was crumbling beneath our feet. There will be many doomsday pundits scaring investors with talk of 25% vacant properties and remaining residents unable or unwilling to pay their rent. It’s instructive to remember that we have been in challenging economic periods before and made it through. Indeed, we can look to the actual results of the last recession to illustrate our point. During the Great Recession of 2008, average rents in Atlanta fell from a high of $948 to $896, a total drop of only 5.5% (average Atlanta rent is $1,267 today). Vacancy climbed from 8.5% to a maximum of 10.6% (8.9% today). These figures represent arguably the worst downturn of a generation. Moreover, that financial crisis was in large part caused by real estate. We therefore believe that it’s easy to overestimate the downside of our current predicament. It is critical to remember that the real pain of the Great Recession was overleveraging and the subsequent instability of the foundation of financial markets. The financial industry, as a whole, is far healthier and more stable today. Additionally, the fundamentals behind our business were strong headed into this pandemic and we expect them to be strong coming out of it as well.
While the precise black swan event of a worldwide pandemic was a surprise to us all, for over a year now Arcan has repeatedly predicted that distress would befall the markets in 2020. As such, we have been actively planning and preparing for a recession and corresponding market correction. We want to remind everyone that although unfortunate, market distress creates opportunity. Indeed, this is precisely why we have been raising a fund to help investors capitalize on a pullback or correction in the market. While it is much easier said than done, on the investment side, we try to act as Warren Buffett advises and to “be greedy only when others are fearful.” As fear takes hold in the market, Arcan will remain ready to take advantage of opportunities. On the personal side, Arcan is doing everything it can to help our residents, employees and others during these difficult times. We will remain a calm employer, investor, manager and advisor. Our only advice to our friends is to do the same. We will continue to closely monitor every aspect of the market and report back as events unfold and the near-term future becomes more clear.
As always, if you have any thoughts, questions or ideas, please feel free to contact any or all of us. We wish you and your families the best.
In good health,
The Principals of Arcan Capital:
Steve O’Brien, Jeremy Lantz, Shauna Lantz, Carrie O’Brien & Andrew Lorber