The 2020 Effect: How the Year’s Events Impacted Florida’s Apartment Industry
By Brad Kuhn
As COVID-19 swept through the country in the first quarter of 2020, vulture capitalists raised more than $300 billion to take advantage of distressed real estate sales. Smart money, at the time, was predicting widespread fallout in multifamily real estate as a looming economic shutdown threatened to wreak havoc on the finances of the two-thirds of Americans living paycheck to paycheck.
Conventional wisdom suggested that multifamily real estate would be hit hard by this disruption, as tenants lost their ability to pay, and federal eviction moratoriums prevented landlords from returning nonearning units to leasable inventory. To be sure, that doomsday scenario did play out in some markets – particularly those that rely heavily on the tourist trade. Interviews with leaders in various sectors of Florida’s apartment industry, however, suggest that the state proved more resilient than most, and in some ways the disruption helped inspire innovation and created an imperative for changes that were already in the works.
According to commercial real estate services and investment firm CBRE, multifamily weathered the 2020 recession better than most property sectors, and market deterioration was far less than in previous recessions. CBRE forecasts a return to pre-COVID vacancy levels and a 6% increase in net effective rents in 2021 and a full market recovery by early 2022.
The company’s 2021 multifamily forecast predicts a rise in multifamily demand this year, driven by younger renters entering or reentering the market – either moving out of their parents’ homes or “unbundling” from rent-sharing arrangements with friends due to improving job prospects and financial independence.
Class A assets were disproportionately affected by COVID-19 as young adults facing job loss or uncertainty moved back home or temporarily downscaled, and may not begin recovering until mid-2021. Class B assets should continue to outperform in 2021 with low vacancy and steady rent growth.
CBRE expects development to remain robust in 2021. Most of this year’s scheduled deliveries were started long before COVID-19 and likely will reach 280,000 units in addition to the estimated 300,000 units delivered in 2020. This level of new supply will temper improvement in Class A vacancies and rents in many markets.
Florida Results Varied
Remote working and the closing of many urban amenities – theaters, galleries, etc. – led many renters to migrate, not only to the suburbs, but also to warmer climes such as Florida, where they could enjoy unrestricted outdoor activities.
“Today, because there is so little going on in New York City (for example), people who never would have considered leaving are moving to South Florida, paying half the rent, and working from home,” said Israel Schubert, senior managing director in charge of Florida operations for Meridian Capital Group. “I have a friend who told me, as recently as a year ago, he’d never live in Florida. With everything in New York shut down, he and his wife rented a place in South Florida. They came to try it out and have decided to stay.”
South Florida has always been a very tight market for Meridian’s multifamily clients, Schubert said. The story there in 2020, he said, was demand for space upgrades, as people who had previously approached their apartment rental decisions from a more utilitarian perspective decided that if they were going to be spending all their time at home, they wanted more space, a nicer space, or a better view.
Renter defaults, overall, he said, have been far less than expected, and property defaults, such as those anticipated by the vulture capitalists, have been virtually nonexistent.
“When this whole thing started in March, it was very concerning,” Schubert said. “Many of our large owners thought the world was coming to an end and no one was going to pay any rent. That initial desire to get on the phone with lenders for forbearances very quickly evolved to their surprise that collection and occupancy continued to maintain strength, in every market. It turned out that when everyone was stuck at home, nobody wanted to be without a home.”
Schubert said he’s seeing reports of rental growth of 2%-4% in markets such as Jacksonville, Tampa, Daytona Beach, and Cape Coral. Other areas, such as the tourist submarket of Orlando, experienced a dip in the second quarter but seem to be recovering.
Tough on Tourism
Lydia Bishop, managing director at Greystar, said rent delinquency in Orlando’s tourism submarket peaked at 7%-8%, increasing the company’s normal Central Florida market average from less than 1% to 4%. An atypical surge in tourist-area apartment vacancy constrained rent growth and brought back rent concessions of up to two months of free rent.
“We were on a run of six really strong years in Central Florida,” Bishop said. “We had high population growth, and occupancy was strong. With COVID, the world changed, as theme parks laid off or furloughed employees.”
Greystar experienced an instantaneous increase in both delinquency and vacancy rates in the tourism submarkets. That was primarily in Orlando, but also in South Florida as tourism industries, including cruise lines, were forced to halt operations.
“Orlando has had the greatest impact,” she said. “Jacksonville and Tampa, which have a more diverse industry employment base, weren’t hit as hard.”
In a stroke of good fortune, the pandemic found Florida’s Affordable Housing Trust Fund fully funded for the first time since 2007. Trey Price, executive director of Florida Housing Finance Corp., the state agency that administers distribution of the funds to local partners, said he entered 2020 with $395 million, spread over the agency’s various rent and mortgage assistance programs.
The agency received an additional $250 million under the CARES Act, prompting Florida Gov. Ron DeSantis to return $225 million of previously allocated state dollars to the general fund. This raised concern in some quarters that tenants with affordable housing needs unrelated to the pandemic might suffer, but Price said such concerns were unwarranted because the CARES money was distributed through the same channels as the state money.
If anything, Price said, the influx of federal money brought increased concern for the housing needs of the economically challenged. For example, he said, the state waived a 30% matching requirement for rental assistance in November, when it became apparent that people were having trouble meeting even the lower amount, especially in the tourism and service sector submarkets of Orlando and South Florida.
Overall, however, he said, renters showed surprising resiliency, with late and delinquent payments increasing only marginally, and much less than anticipated.
“I think Floridians are adaptive, hard-working people, who want to make sure the rent gets paid,” Price said. “People borrowed from relatives, borrowed on their credit cards, or found other ways to make cuts in their household budgets to ensure that the rent got paid, even when they were unemployed or underemployed.”
For 2021, DeSantis has requested $420 million for affordable housing, a $25 million increase from 2020.
Remote working and demand for contactless transactions accelerated a trend toward virtual property tours and leasing that had been moving forward slowly.
“The biggest effect we’ve seen has been in how residents are going about finding their apartment,” said Darren Pierce, a vice president at ZRS Management LLC. “We were already beginning to adopt the technology, but when COVID hit, we rolled it out immediately.”
According to Pierce, under COVID, apartment leasing became more like buying a car.
“With the technology, by the time a potential tenant gets to the property for the first time, they already know what floor plan they want and what pricing they can afford,” Pierce said. “They’re looking for a test drive. That has helped us refine the process with FaceTime tours and photos of views so that we can get them into the unit with minimal human contact.
The pandemic also affected the type of unit people were looking for, Pierce said, as couples and roommates had to think about how they could cowork as well as cohabitate.
Pierce said he thinks the technology changes are one example of “the 2020 effect” that is here to stay.
“I think most of us were already moving in that direction,” he said. “COVID just accelerated it.”
Coworking at the Clubhouse
In addition to a revival of in-unit workspaces, which had fallen out of favor since the 1990s, Florida property managers reported increased demand for coworking space in clubhouses and common areas.
“Rather than putting in computer stations, we’re putting in pods, where the social distance is already built into egg-looking chairs with USB ports and electrical outlets,” said Jeremy Milton, senior director, property management, at RangeWater Real Estate.
Others reported rearranging furniture and opening windows to create more air flow and improve ingress/egress.
Luminous, a cloud-based residential solution provider in Everett, Wash., entered 2020 riding high on the success of its popular Parking Boss multifamily parking management software, used by some of Florida’s biggest property management companies, including Greystar, Lincoln Property Co., and ZRS. The company had developed a new product for scheduling amenities and was hoping to sign maybe 150 charter clients in the first year.
The product, called Amenity Boss, allows residents to electronically reserve amenities ranging from treadmills to barbecue grills, freeing property staff from a tedious chore and helping to reduce face-to-face contact.
It was a classic case of having the right product at exactly the right time.
“The product launched at the end of April,” said Jeanne Klein, East Coast director of sales, based in Fort Lauderdale. “We had 1,000 clients within three months. It was a very wild ride.”
Fernando Ramos, owner of Pristine Concepts Inc., a multifamily property cleaning company based in Tampa, said his company’s business dropped 45% in April as a result of the lockdown. To save his company and provide work for his hundreds of employees in Central Florida, he began offering COVID-19 sanitation services, at cost. In June 2020 he reported his highest monthly revenue in 13 years.
Ramos said that prior to the pandemic his company serviced 270 clients. He gained an additional 120 during the pandemic, an increase he attributes to a combination of affordable sanitation rates and a high number of cleaning companies that failed during the shutdown.
Heading into 2021, he said most of his clients have figured out their own COVID-19 sanitation routines, but he is fairly confident that the new clients will be sticking with him for other, more routine cleaning services.
Although every individual property owner, funder, and third-party management company had to develop its own strategy for navigating the events of 2020, the year will also be remembered for the ways the industry came together, peer-to-peer and through the Florida Apartment Association and its affiliates, to exchange best practices on public health, amenities, and other noncompetitive areas to look out for each other, and the entire multifamily community.
“Associations were incredibly helpful,” said Michael Krause, a partner with Atrium Management Co. “Forums and town halls gave us each, individually, the opportunity to exchange ideas and pull from the shared experiences of hundreds of companies.”
Forums and the distribution of official guidance, such as CDC guidelines, helped property managers come to consensus on important issues, including the safe operation of amenities – pools, gyms, business centers, etc. – as well as furniture layouts, the suspension of noncritical service requests, and disinfection/sanitation practices and training.
Although the pandemic has continued into 2021, there is hope in the form of a national vaccination effort. After almost a year of living with COVID, Florida’s multifamily community has adapted and is looking forward to better times ahead.
“The pandemic showed everybody you could work effectively from home,” Schubert said. “I think that has opened a lot of companies’ eyes about what work will look like going forward.”
No one is predicting a return to the hollowing out of cities that occurred in the 1960s and 1970s. Downtowns are expected to regain their appeal post-pandemic, as entertainment venues reopen and people become more comfortable congregating. But neither is anyone predicting that the multifamily market will return to pre-pandemic practices.
The technology changes are most certainly here to stay. And Pierce and others say the new sanitation practices have been adopted as standard operating procedures.
Investors seem to agree. The construction of new units continued throughout the pandemic, and though the pipeline of new projects dropped precipitously in 2020, CBRE is projecting a 33% increase in multifamily investment nationally in 2021 and a return to pre-pandemic levels by 2022, with Jacksonville and Tampa expected to rank among the hottest markets in the country.
So Florida seems to have been a net beneficiary of the pandemic and pandemic-related migration. The question now becomes whether those pandemic-inspired transplants will stay once life returns to normal in New York City and other major northern metropolises.
“Will people stay? This is the trillion-dollar question,” said Schubert. “Most people are of the belief that you can’t write off cities like New York just because people are dumping on it. Cities are going to reopen. But is everyone just going to pick up and move back? I don’t think so.”