COVID-19’s Impact On The Real Estate Market
There’s no denying the pandemic’s impact on the real estate market, particularly when it comes to the rental industry. Limited cash, renters’ job instability, and the eviction moratorium presented new financial challenges for landlords and real estate investors. In order to stay afloat, those managing properties had to quickly change the way they did business.
Many of these changes worked. Fewer landlords than expected were forced to sell parts of their portfolio due to the pandemic’s financial pressures and fortunately, at least in the United States, the end appears to be in sight.
As we settle into a new sense of normalcy, it’s possible for us to begin evaluating the impact of the past eighteen months more accurately. With that in mind, let’s look at the kinds of real estate portfolios most affected by the pandemic, and the adjustments landlords made—and plan to keep in the future.
Pandemic Impact by Real Estate Sector
The rise in pandemic-related unemployment caused rippling financial shortages throughout the rental market. Although the unemployment rate has recovered massively from its spike last April, it remains around six percent, two points higher than it was before the pandemic hit. Understandably, this has hurt the portfolio outlook of many landlords. Our Innago survey of 440 landlords and over 1300 tenants reports that 26.1% of landlords have seen a negative effect on their portfolio as a result of the coronavirus. These results align with surveys conducted by Avail and Buildium, who reported 24.2% and 27%, respectively.
In all of these surveys, some landlords did mention that the pandemic had a positive effect on their portfolio. It’s true, the distress that one landlord faces might turn into another’s investment opportunity. Low interest rates also make now a good time to buy; however, investors have been active in the market, inflating housing prices and leading to a mixed outlook overall. More distressed landlords means more bargains, but you may have to dig to find them.
Not all sectors of the market have been equally affected, according to our survey.
Residential landlords were the most insulated, with just under 6% forced to sell a property due to COVID-19. This may seem surprising, given that the eviction moratorium applies mostly to residential renters. Residential renters, however, often have support from a spouse, roommate, or other domestic partner. In addition, rent relief programs apply more to residential housing than to any other portfolio category. Although the rollout of rent relief has been slow, it has helped some residential landlords hang on.
Commercial properties are a different story. When a business goes under, it’s often gone for good. And although commercial landlords were largely unaffected by the eviction moratorium, many landlords faced a drawn out legal battle to terminate the lease and look for new tenants, a process that’s longer and more complicated than evicting a single residential tenant. Many commercial tenants are subsidiaries of a larger entity, causing legal and communication issues for landlords having to negotiate with a regional headquarters located nowhere near their brick-and-mortar tenants. If the company filed for bankruptcy, the subsidiaries were left not paying rent for months. As a result, nearly 13% of commercial landlords reported a sale due to COVID-19.
Student housing saw the biggest impact from the coronavirus, with almost 16% of landlords reporting a property sold because of the pandemic. The specialized nature of student housing makes it difficult to rent to other tenants, so these properties lost nearly their entire renter pool when universities switched to an online-only format. More broadly, the pandemic has caused many schools to re-examine which classes to offer in person, and in the future, colleges will probably continue to offer expanded online options in addition to in-person classes. Even so, college students don’t want to live at home, meaning this hybrid system presents hope for a sizeable recovery in this sector as schools reopen in 2021 and beyond.
The news is not all bad in the rental market. Realpage reports that rental prices rose 1.7% in May 2021, up to a 4.2% annual growth, with the hardest hit residential properties (such as luxury apartments) recovering the fastest. Lower unemployment will eventually mean a healthier market—as the pandemic wanes, the economy will recover in kind.
With 15% of renter households behind on rent (according to the Census Bureau) many landlords have realized that something is better than nothing. In order to stay afloat while strapped for cash, landlords have granted a number of rent concessions to tenants. Rent concessions are any deviations from the terms of the lease, and can be used to get what money you can from a tenant, to encourage renewal, or to fill a vacancy faster. Examples include accepting partial payments, entering into a repayment plan, extending due dates, waiving late fees, or allowing tenants to dip into security deposits to pay rent.
According to MRI’s April Market Insights Report, the total value of rent concessions peaked in January 2021 at about 220% of the 2019 baseline, and now hovers around 180%. Year over year, Entrata reports a 79% increase in late fees waived per unit, and a 19% drop in late fees posted, with repayment plans up 420%.
Tenants may not always see these concessions, either. Per our Innago survey, 40.5% of landlords report granting a rent concession since the pandemic started, but only 16.4% of renters report receiving any concessions. A renter may not realize that a pushed due date is a concession, especially if you usually give a grace period. Other tenants may simply be too far behind to notice. Clearly, communication is key. Make sure your tenants know what you are doing to help them through this.
With so many renters behind on payments, it’s no surprise that landlords are struggling to afford improvements and maintenance in their units. Buildium reports that maintenance was already the biggest stressor among large-scale landlords before the pandemic, with 42.7% listing it as a source of stress. During the COVID-19 pandemic, that number has climbed to 56%, showing more growth than any other stressor. For smaller landlords, this number climbs higher, with over two-thirds of DIY landlords listing maintenance as their biggest headache, twice as worrisome as filling a vacancy.
Manufacturers and maintenance staff have since adapted to safe in-person service, but the early months of the pandemic saw disruptions in supply chains and communication for all involved. In many cases, social distancing guidelines required improvements such as plexiglass to be but in place. Elevators faced an increased workload, as they could only carry one or two people. All properties demanded a greater emphasis on cleaning public spaces.
Under the pressure of making these improvements, and under a broader financial strain, figuring out which maintenance tasks to put off is no mean feat. You’ll need to work with both your tenants and your maintenance staff to determine which repairs are essential. Beware, though: large appliances such as furnaces often come with the warranty contingent on regular service—putting off that check-up could void the warranty.
Even outside a moratorium, eviction remains a tedious and expensive process. It’s imperative to ensure that new leases go to tenants with a stable income, especially when many renters are facing financial uncertainty.
As a result, according to the National Rental Home Council, 33% of landlords have tightened screening practices during the pandemic. This mirrors a Buildium survey, which reports that 45% of landlords named screening a top priority in 2020, up from 16% in 2019.
Strangely, our own Innago internal data show no noticeable increase in screenings per unit, and neither does Entrata. The more rigorous screening practices that landlords are employing could be more personal, invisible to online property management software. Landlords may be screening by following up more closely with employers or previous landlords, or they may be employing pre-screening tactics like mentioning a credit check on the listing in order to ward off renters who won’t pass.
Whatever the case may be, keep screening. It leads to more reliable renters.
Due to social distancing, many landlords moved their businesses online—and discovered several benefits.
Virtual showings and self-guided tours allow landlords to generate leads on vacant property without meeting prospects face to face. According to Entrata, 74% of property managers that now offer virtual showings offered them for the first time in 2020. For virtual showings, tour-to-application conversion rates are 26.6% compared to 27.74% for in-person, guided tours, and tour-to-lease conversion rates are 18.47% virtual 19.86% in-person. That’s pretty impressive, considering that virtual showings are much easier to coordinate, and cost you less of your time.
Online leases, stored in the cloud and easily accessible by both parties, are more secure than hard copies, and make renewal much easier. They are far less likely to be lost, which means your tenant will always have it handy if you need to refer to it in the future.
Online payment options, whether by card or ACH, are quicker than paper checks, money orders, or cash, and allow instant, secure record-keeping on both sides of the transaction. According to our Innago survey, 77% of tenants prefer to pay their rent online, and over the past year, there has been a 360% increase in documents signed online, a 105% increase in tenants paying online, and a 117% increase in dollars collected online, all per landlord (meaning these numbers discount our internal growth). These numbers show a clear trend toward adopting and sticking to online transactions.
The pandemic has affected all sectors of the rental real estate market, with student housing managers hit particularly hard. Other landlords weathered the storm by changing how they did business and adopting new tools.
Adapting to a pandemic has required flexibility, and so will re-adapting to normal life. Rental management software has been especially welcomed by landlords and tenants for the ease and speed of features like online rent payments, automated maintenance tickets, and enhanced tenant screening.
A variety of rental management tools exist, for every size and type of landlord. Whether your property portfolio is small, mid-sized, or large, there’s a software tool that will help you cut costs and save time as you manage your units.
About the Author
Innago is a free, easy-to-use property management software solution, designed to save you time & money. Innago allows you to easily: collect rent, screen tenants, list properties, manage work orders, create applications, sign leases, organize financials, communicate with tenants, & much more! Learn more here