One Company’s Experience Dealing with the Unknown of COVID-19
3 key questions we asked to determine our course of action
Renters Warehouse was heading into a spring market that had great potential for us. New clients. New technology. We had just spent a year integrating the largest third-party management company in single-family rental (SFR) with a marketplace platform that enabled us to help customers buy, lease, own and sell SFR under one roof.
The second quarter of 2020 was about to be legendary—and then COVID-19 hit.
The unprecedented unknown was nerve-wracking. What’s the worse-case scenario? We couldn’t even really imagine the worst worst-case, because that was something from a horror movie.
To put revenue numbers to these scenarios, we had to figure out how people were going to respond to the crisis. We made educated guesses about how people would react—and what that would mean to Renters Warehouse.
Question 1: Were tenants going to pay the rent?
Revenue for our landlord clients is rooted in tenants paying their rent. Some politicians ran to the microphone to encourage people to skip their rent payments. It was conceivable that as much as 50% of rents could be delinquent.
As we tracked rent payments day by day in April, we found very quickly that our tenants, people who reside in single-family rentals with average rents of about $1,650 a month, were going to pay. In a normal month, 97% of the 22,000 rents we collect are paid on time. On April 1, 43% of our rents were paid. We finished the month at an astonishing 93% paid—just a few points below a normal month.
We breathed a sigh of relief and started worrying about May. My personal love for SFR hit a new high March 1, 2020, when 58% of our tenants paid their rent on the very first day of the month. That was a record, and something clicked when we saw that.
What is “essential” to life in America has taken on new meaning during this crisis. It’s now a subject of everyday conversation. Obviously, shelter is essential. After all, these days, the only way to keep your family safe is to go to a certain place and stay there. That place is home.
But there is more to this. At a time when powerful people were chanting #CancelRent, we achieved the highest first-day rent collection percentage in company history. When things are tough and uncertain, people continuing to pay their rent is an indicator that housing stability is important. People aren‘t messing around with their housing situation.
Question 2: Are we going to be able to continue renting homes?
The question about rent being paid was about recurring income. For owners, that’s rent being paid. For a property management company, that’s management fees being paid.
But would people sign new rental leases and buy investment property? That’s the other half of our business and it forced the question: Is movement in housing essential? In other words, in times like these, anyone who can stay in place probably will. So, who needs to move?
For this we looked at the only historical comps we could find: the financial crisis of 2008 and the terrorist attacks of 2001.
If the movement of people in a time a crisis was what we were trying to understand, 2008 home sales were a reasonable indicator. If no one in their right mind would buy or sell a home in a housing market “free fall,” who would still buy or sell because they had to? The answer was two-thirds. According to the National Association of Realtors, about 35% fewer homes were sold in the years after the crash of 2008 than during a normal housing market. Keep that number in your head.
In 2001, I was on a management team that ran a decent-sized real estate brokerage in the New York City suburbs. After the terrorist attacks, the housing market froze. Everyone was hunkering down. I assume it was more intense in New York than in other parts of the country because we all knew people who had died, and many of us saw the smoke from the buildings with our own eyes. The city was the economic engine we depended on, and it had just been hit hard. We were wondering whether anyone would buy real estate in New York again. We wondered if this was the beginning of a new normal where restaurants and theaters were going to be bombed on a regular basis. If so, who would want to live near that? So, this time period and circumstance presented another reasonable comp for today—something totally unprecedented, unknown and out of left field.
By October and November 2001, the market thawed out and the number of homes sales leveled off at a 35% reduction from where it was otherwise going to be. There is that number again. When no one wants to move, two of three people who were planning to move still do.
So, at Renters Warehouse, we felt it was reasonable to forecast that 35% of the potential tenants we would have placed in the second quarter of 2020 would not move but 65% would probably still need to rent houses.
We sounded the alarm to our agents to stay in the game. The pie would be smaller, but there was still going to be a pie, and we needed to get a healthy slice of it. Real estate agents on straight commission would be automatically furloughed if they didn’t stay productive, so it was critical to sell them on the expectation of a smaller, but active market. This was no time to go dormant.
Here is how it played out. During the third week of February, our new tenant inquiries—our early indicators of tenant behavior—fell off a cliff. By the middle of March, they leveled off and stabilized at a 35% reduction from the norm. Since then, they have increased.
In the final tally, our tenant placements in April were, you guessed it, about 35% off what we budgeted before COVID.
Based on this, we believe home purchases will come back and level off at 35% below normal for as long as the coronavirus crisis is impacting our economy. No one knows how long that will last. I personally believe this will be contained in 2020, and spring 2021 will be a normal and healthy home sales market.
Question 3: How is this going to impact SFR going forward?
Single-family rentals continue to show their resilience. Under stress, the asset class shines.
It’s already clear that institutional investors consider it a safe haven in times of trouble. Multiple announcements have already been made that giants of the industry like Invitation Homes and American Homes 4 Rent are seeing an influx of new capital.
There is also a second wave of institutions entering the space. Companies that are very experienced in other forms of real estate investment, like commercial and mortgage servicing, are seeing SFR as an attractive place to bring their investors.
Imagine owning and operating a massive portfolio of office space right now and wondering how many people are never going back to the office.
Imagine owning and operating a massive portfolio of hotels or retail shopping centers and wondering if those businesses will ever get back to full capacity.
Imagine owning a massive portfolio of mortgage servicing rights and watching the federal government cut rates to nothing as a way to stimulate the economy. When your servicing rights become less valuable every time the government uses that stimulus, you are vulnerable to the whims of politicians—and that’s not a comfortable place to be.
And finally, imagine you have massive exposure to the stock market. Enough said.
Single-family rentals are the shelter of 20,000,000 families in America. When things are good, those homes become more in demand as homeownership increases, and home values increase along with that demand. When things are bad, rentership increases—and yields along with it. When people won’t work in the office, they work from home. When they won’t shop in a mall, they shop from home. When they won’t vacation, they staycation.
Capital managers across the globe now understand and appreciate these realities. The future is bright for SFR.
From a business perspective, are there any silver linings?
The most impactful positive to come out of this experience has been the ability to see how people perform under stress. I have been amazed by the strength of colleagues and friends in the business world. Business operators know how to shake off paralysis, gather data, analyze it with a healthy dose of intuition and take action.
As new facts emerge, business leaders at all levels adapt and pivot. Almost everyone I know in business, and some I can observe from afar, have performed valiantly through this crisis. No one asked for this, and the families that were directly impacted by the disease and/or the economic fallout are not forgotten. But the silver lining is going to be how we beat it, together.
