May 2020 – Page 2

SFR in the Age of Covid-19

by Erica LaCentra
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How the coronavirus could impact the single-family rental market At the start of 2020, the future was very bright for the single-family rental market. Rental demand was growing, and real estate investors had a clear and immediate opportunity to make money in the coming year. Tight rental inventory and funding seemed to be the biggest challenges that investors would face in the most desirable markets of the U.S. For the savviest investors who were able to pay attention to emerging trends, there were no obstacles too large that could put a damper on the opportunities that lay ahead of them. However, that all changed with the emergence of the coronavirus. As we draw closer to the middle of the year, we’re starting to get an inkling of the virus’ impact on the global economy. Let’s delve into the immediate impact this pandemic has had on the real estate industry, specifically on the single-family rental market. Affordability Concerns As the coronavirus continues to disrupt businesses and drive down the U.S. stock markets, there is a very real concern about how individuals and businesses will suffer as a result. During the last decade, low inventory in the single-family rental market drove the growth of rent prices. But for current and prospective renters who are dealing with loss of income, affordability challenges will be a growing area of concern. According to CoreLogic’s Single-Family Rent Index, released in March 2020: “U.S. single-family rents increased 2.9% year over year in January 2020, down a bit from the gain of 3.2% in January 2019.” Also “increases in rents averaged 3% over the past year, which is more than double the rate of inflation over the same time period.” With rents increasing at double the rate of inflation, there is no question that this has negatively impacted affordability. This is what poses the biggest future issues for investors who purchased SFR properties in areas of the U.S. that showed the most promise in terms of growing rents. ATTOM Data Solutions already reported that “single-family rental returns moderated in the first quarter as rents did not increase as fast as the price growth for investment rental properties.” That means investors already might not be seeing the returns they had initially hoped. While rental demand will remain in these areas of the country for the foreseeable future, rent may no longer be affordable for current or potential tenants. Investors may ultimately have to take a hit on their SFR investments and lower rent prices. New Construction & Build-to-Rent At the beginning of 2020, new construction and the build-to-rent niche were poised to become a much larger segment of the market for investors. However, with the onset of the coronavirus, these areas of the market now face a variety of obstacles to their growth. First, short-term demand has fallen due to potential buyers being worried not only about their personal health and the risk of being in public, but also due to their financial health. The full economic impact of COVID-19 is still unknown. With so much financial uncertainty, it is unlikely for demand to remain strong in coming months. There are also supply-chain disruptions to consider, both domestically and internationally. China, the world’s largest manufacturer, has been hit hard by the coronavirus. It is inevitable then that there will be a drastic reduction in available materials. Unfortunately, as factories and businesses have shut down in the U.S., there is no way to supplement this loss by producing materials domestically. And even if materials are currently available, fewer people will be willing or even able to work on new construction and build-to-rent projects due to mandatory work restrictions in many areas of the country. What About Short-Term Rentals? Travel is one of the industries hit hardest by COVID-19. That does not bode well for the current outlook on short-term rentals. Broad travel restrictions with indeterminate end dates means short-term rentals will sit without occupants for the foreseeable future. Owners of short-term rental properties who may consider turning them into long-term rentals as a way to remedy the current situation face a different set of challenges though. First, there is the issue of trying to find a tenant. Besides the obvious difficulties of trying to get a tenant in place during a pandemic, many short-term rental properties are in areas that are desirable to travelers but not to long-term renters. Second, the home may require substantial maintenance, updating or a complete overhaul to be appealing to a long-term tenant. Often these issues are not a concern for short-term occupants. Finally, there is the concern of cash flow. Will the property be nearly as profitable as a long-term rental as it was as a short-term rental? In most cases, probably not. If a long-term tenant does end up occupying the property, unless they are paying month-to-month or signing a short-term lease, the owner will not be able to use the property as a short-term rental until the existing lease expires. On the positive side, short-term rental investors who are able to weather the storm should benefit from the huge travel boon that is most certainly to occur once the threat of the virus has dissipated. With folks adhering to self-quarantines, it is inevitable that people will want to get out and travel again at the end of all of this. Which Way Will the Housing Market Go? To set aside the doom and gloom for a moment, in a survey conducted by Redfin in March 2020, “about 40% of Americans anticipate that the recent spread of the novel coronavirus, also known as COVID-19, will have a negative effect on the housing market.” However, maybe more surprisingly, “half of the respondents expect no effect at all on the housing market, while 8.9% predict that it will have a positive impact-likely due to the recent drop in mortgage rates.” While there is still optimism that the coronavirus will have little effect on the housing market and home sales data from January into February

Are We Headed for a Corona Recession?

by Ingo Winzer
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What that means for real estate investors? There might have been some question about whether the coronavirus would lead the U.S. into a recession. The hoarding of toilet paper makes me think it’s certain. Not because we’ll run out of toilet paper—the U.S. and Canada produce volumes of it—but because hoarding means consumers are really worried and are changing their spending behavior. That won’t just flip back in a few months. It’s consumer behavior—what consumers think and do—that grows or shrinks the economy, not bank failures or layoffs at airlines. Consumers are 70% of the economy, and they’ve already been on edge the last few years. Consumer debt, even after you consider inflation, is at the highest levels we’ve ever seen—$12,000 per man, woman and child. And the growth of jobs in 2019 was at the lowest rate since the last recession. So, it’s not surprising that the rate at which consumers have been spending was already slipping. I didn’t expect a severe slowdown this soon, but when the economy is fragile to start with, anything can happen. That’s why the coronavirus isn’t the cause of the recession that now seems inevitable; it’s the catalyst, suddenly accelerating a slowdown that was already in the works. Consequences for Real Estate Recessions produce government reactions and public responses that strongly affect real estate. This time we won’t see massive foreclosures and a wholesale drop in home prices as happened after 2008. In fact, it’s much more likely that the effects this time will actually be good for real estate investors. The government will push interest rates even lower. This means, for example, that financing an investment in rental property not only will be cheap, but the returns on alternate investments like bonds and CDs will remain poor. Investment funds and other sources of money will welcome real estate projects. Banks in particular are now so heavily dependent on consumer loans that they have a large incentive to shift more money into real estate. More consumers will need (and want) to rent. Homeownership for young adults has been declining for decades, to around 35%. With incomes stalled, home prices high and more people with student debt living in expensive big cities, that trend will continue. And after promoting mortgages and homeownership relentlessly for the past 50 years, the government may (that’s more of a guess) finally provide more policy support and tax breaks for renters. Specific Markets Some real estate markets were in a home price boom in the past few years. Think: San Francisco, Seattle, Denver, Miami, Las Vegas, Southern California and others (see Chart 1). Because the local economies were doing well, I thought the bubbles could end in a soft landing. Now I don’t think so. Eventually, these will be great places for investors in rental properties. After all, that’s why the bubbles happened—more demand than supply—but first we need to see where prices will settle. Some markets with large renter populations are better immediate bets, even though demand will flatten everywhere for a short while. They’re not high-growth markets, but they aren’t overpriced and the ratio of home prices to annual rents is favorable. Think: Chicago, Memphis, Detroit, Atlanta and others (see Chart 2).

by admin
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Atlanta-based wealthtech platform GROUNDFLOOR has launched a new program to ensure that capital for residential real estate development continues to flow during the COVID-19 financial crisis. The new program allows investors to earn an additional 4% interest rate bonus for90 days on qualifying investments. “Our community of individual investors is a powerful force that is keeping the value chain of real estate finance moving forward on fair terms for all,” said GROUNDFLOOR co-founder & CEO Brian Dally. “The GROUNDFLOOR stimulus program rewards investors for stepping in to provide real estate entrepreneurs and developers with the funding they need to keep their businesses, and our economy, moving.” GROUNDFLOOR, which is not a fund or a pool, was founded in 2013 as a result of the Great Recession. The founders’ vision was to open private capital markets to all by making them more broadly decentralized and more resilient during challenging times. It was the first company qualified by the U.S. Securities & Exchange Commission to offer direct real estate debt investments via Regulation A for non-accredited and accredited investors. The company has raised $22 million in equity capital from several sources, including venture capital and online public equity offerings. As of its most recent round of financing in 2019, the company is 20% customer-owned.

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Yardi has released a software update that allows residential property management companies to manage and track rent deferral payment plans and recoveries. The company fast-tracked the release of the update to allow property managers to accommodate residents impacted by COVID-19. “Helping property managers serve their residents and maintain business continuity is a top priority for Yardi. With unemployment claims skyrocketing, our clients were looking for ways to aid residents who are having a hard time paying rent during the coronavirus pandemic,” said Tamara Berndt, vice president of residential services at Yardi. “This solution can manage and track payment deferrals and recoveries on a large scale.” The deferral payment plan and recovery tool allows payment plans to be set up for residents who ask for financial accommodations, and it creates a recovery schedule of the deferred amounts. Once the deferral agreement is signed, lease charges are automatically created each month with the deferred amounts and recovery charges as appropriate. Gross potential rent isnot impacted. The new technology is available to Yardi residential clients, including multifamily, single-family, affordable and military properties.

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In late March, the U.S. Court of Appeals for the Federal Circuit upheld the district court’s decision to dismiss the patent lawsuit between Consumer 2.0, Inc. (dba “Rently”) and Tenant Turner, Inc. “We not only defended ourselves from Rently’s misguided patent, but we also defended the property management industry’s freedom to choose the best leasing software provider from the marketplace as it deems fit,” said James Barrett, Tenant Turner’s CEO. “Rently attempted to preempt the entire concept of self-access viewings. This is a huge win for renters and property managers everywhere.” Rently filed suit against Tenant Turner July 3, 2018, in the U.S. District Court for the Eastern District of Virginia. The court dismissed Rently’s complaint later that year following oral arguments and again in April 2019. Rently appealed to the U.S. Court of Appeals for the Federal Circuit May 3, 2019. Oral arguments were presented before a three-judge panel of the Federal Circuit Court of Appeals March 5, 2020. The court unanimously affirmed the District’s dismissal March 9, 2020. The patent in question broadly described the concept of self-access viewings of properties for lease by property management firms. The court dismissed the case in favor of Tenant Turner and stated the disputed claim in the patent is an abstract idea not valid for patent protection.

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Real estate development executive Michael Johnson has launched Raamp REIT (Real estate Asset Acquisition Management Portfolio). Raamp REIT is Arizona’s first exclusively multifamily, real estate crowdfunding platform and asset management company. Raamp REIT is structured as a real estate investment trust (REIT). It has a minimum investment of $2,500, and the fund is open to nearly all investors, including casual investors. By investing in the REIT, investors gain access to a diversified pool of commercial real estate investments with a single investment. The fund intends to invest in commercial real estate with a specific eye on multifamily. All rents are guaranteed by the Housing Authority of Maricopa County. Through this program, Johnson has become the State of Arizona’s largest subsidy rental partner. In addition to providing for adequate and affordable housing for those who are less fortunate, this fund is also designed to have low fees for investors. By offering Raamp REIT exclusively on its platform, Raamp.io affords investors direct online access to the product with no sales commissions. Offering expenses are capped at 3%. Johnson’s real estate team takes a relatively conservative approach when selecting transactions to offer for investment, investing only in cash-flowing properties. This approach will carry through to Raamp.io. “Through our focused investment strategy, we can invest in both debt and equity in our specific property types and it will allow us to be very opportunistic,” said Johnson. “We have two objectives for the fund: one is providing investors with both consistent cash distributions and two, the opportunity to benefit from potential appreciation in property values.” The launch of Raamp.io and the new REIT add to the wave of opportunity to invest in real estate. Until recently, private investment markets have been off-limits to many retail investors. Legislation such as Regulation A+ and Title III of the JOBS Act has leveled the playing field by allowing non-accredited investors making less than $200,000 a year to access these investment opportunities through online crowdfunding. Through Reg A+, Raamp REIT gives nearly all investors a new entrance to curated and pre-vetted private real estate investing. In February 2020, Johnson announced that his firm had surpassed $8 million in crowdfunded real estate equity and debt transactions since its inception in 2016. By the end of February 2020, Johnson’s real estate investment portfolio consisted of 13 multifamily properties, a boutique hotel and The Bread & Honey House Restaurant.