challenges May 2020

More challenges in store for rental-housing sector

Landlords brace for rise in rent arrears as COVID-19 crisis continues
Thursday, April 30, 2020
by Erin Ruddy

Challenges due to COVID-19 continue to rock the commercial real estate sector at a fast and furious pace. Since the state of emergency was declared in mid-March, no one could have predicted the severity of the situation, nor that May would arrive and all non-essential services would remain closed, forcing millions into unemployment and in need of government support.

For multi-residential rental property owners, times are taxing to say the least. From the threat of rising rent arrears, to exhaustive cleaning processes and delayed spring building maintenance, everyone’s hands are tied as the risk of infection persists. Smaller landlords in particularly have reason to fear the future.

According to LandlordBC, the vast majority of rental-housing providers in B.C. are small “mom and pop” shops facing huge financial consequencesWithout a backing of cash or credit to cover carrying costs in times of crisis, many are fearing insolvency. Even with the province’s rent supplement program offering $500 per month to eligible tenants, David Hutniak, CEO of LandlordBC, says it’s not enough: “We are calling for immediate action from the B.C. government, asking that effective May 1, the current rent supplement benefit amount be increased to $750 per month for renters with no dependents, and $1,000 per month for renters with dependents.”

Hutniak also took issue with the federal government’s failure to put a rental program in place at the national level. “When the pandemic originally struck Canada, the government should have immediately launched a robust rent supplement program for all Canadian renters,” he said. “They knew very quickly that social isolation was key to containing COVID-19, and that meant ensuring folks had a home to stay in. Renters represent in the order of one-third of all Canadian households, and this ratio is relatively consistent province-by-province. Furthermore, they know that a significant proportion of renters are spending 30 to 50 per cent or more of their household income on rent and utilities, especially in major urban centres.”

Meanwhile over in Ontario, local landlord Chris Seepe is bracing for another month of tough income loss. As the owner and manager of a medium-sized rental portfolio located throughout the GTA, Seepe says he received 82 per cent of rental payments in April, while 10 per cent required re-payment plans due to COVID-related financial struggles. As for the remaining 8 per cent, Seepe refers to them as “the usual suspects” – the segment of tenants he believes is exploiting the crisis for their own personal gain. “I expect this May, I might see the COVID-affected tenants increase possibly to 20 per cent, with the same 8 per cent continuing to exploit the situation,” he said.

But looking ahead toward summer, what can small- to medium-sized landlords expect as the economy slowly reopens? According to Seepe, it doesn’t look good. “Rental operators who have a mortgage greater than 50 per cent of their lender’s assessed property value typically earn net profit (cash flow before taxes) of 10 per cent to 15 per cent of gross income after financing and operational costs,” he said. “If COVID-19 measures continue past August, then we may see the start of a repeat of the 2009 U.S. subprime disaster, where tens of thousands of U.S. single-family homes, condos and small multi-residential rental properties defaulted, leading to the failure of about 525 U.S. banks between 2009 and 2015.”

Adding to that stark outlook, Seepe notes that lenders and CMHC appear to be dramatically reducing property values, while insurance companies have sometimes doubled premiums to account for anticipated rental income losses. “While these losses are temporary and will probably last less than one year, the artificial (and unwarranted) rapid shrinkage in equity and increased costs could make it very tough for small-to-medium operators to refinance for the next twelve months, or to possibly even stay in business,” he said. “Deferred mortgage payments with additional interest and no penalty is a modest, though hardly magnanimous gesture on the part of Canadian financial institutions, which have left residential landlords shouldering the full brunt of the financial losses from the COVID pandemic.”

Larger rental operators faring better  

On the other end of the spectrum, larger companies, like Calgary-based Avenue Living Communities, appear to be weathering the uncertainty without too much difficulty. For the month of April, the company announced it was able to collect 95 per cent of rent revenue from across its vast rental portfolio.

“We have been actively working with residents to help limit the impact of job loss due to COVID-19, offering flexibility with regards to rent payment timing in addition to ensuring they are aware of government support,” said Louise Elsey, COO.  “We feel this greatly helped our residents during the month of April, and our revenue at Avenue Living Communities was not impacted. We are speaking with government bodies routinely to better understand funding programs that are available, so that we may inform our residents of up-to-date, timely information for applications going forward – for May and beyond.”

Similarly, Morguard issued a corporate update on April 28, stating that it too had collected approximately 95 per cent of April rent revenue for its Canadian and U.S. portfolios, a number it says is in line with its historical collection rates. To help those financially impacted by the pandemic, the REIT implemented a rent deferral program and is “actively working with residents on a case-by-case basis.” It also waived the collection of recent rental increases and late fees for existing tenants and says it will suspend collection of further rental increases during this period of crisis.

“The unprecedented COVID-19 global event has demonstrated our strength and resilience as an organization,” said K. Rai Sahi, CEO of Morguard North American Residential REIT. “By activating our Crisis Management Team and allocating appropriate resources, we have coordinated efforts across our portfolios and taken definitive action to ensure the health and well-being of those around us. At this unique time, we celebrate our employees and service partners who continue to provide exceptional service to Morguard communities across North America by upholding our core values.”

Industry-wide challenges

Aside from managing monthly income loss, some of the bigger struggles impacting rental-housing providers come from not being able to maintain service quality or make building repairs due to physical distancing requirements. With health and safety being the top priority at all professionally-run buildings, some key operational tasks have been temporarily sidelined.

According to one industry source (who has asked to remain anonymous), regular communication has been central to management efforts, with technology playing a critical role in how day-to-day business has been maintained. “We provide our tenants with regular updates on preventive initiatives and COVID-19 related notifications using a central repository of communication through an icon on our website,” he said.

Virtual showings have replaced in-person tours, while staff meetings via “Zoom” have become the new norm. Postponement of non-essential work has also impacted operations. This includes things like annual suite inspections; the planting of flowers; pool repairs; changing HVAC filters; cosmetic work for suite turnovers and common areas, and other spring maintenance. In addition, the company has had to implement new work-around procedures essentially on the fly—from how to conduct annual fire alarms in tenant suites, to establishing PPE protocols and implementing hyper-vigilant cleaning practices using hospital grade disinfectant. There is also the matter of increased deliveries for tenants, and the all-important action plan needed for if, and when, a tenant or staff member becomes infected with COVID-19.

As for rent deferrals, the source tells us: “We have capitulated to accommodate tenants who have been impacted financially by coming-up with liberal deferral/repayment plans for April and May rent and holding off on issuing N4s (Termination Notices) and N1s (Notice of Rent Increases). We have also been proactive in providing our tenants with government resources for benefits and financial support.”

But all that said, there’s little doubt that each new day will bring new challenges as stay-at-home orders persist and the threat of infection continues. “We’re seeing tenants who committed to leases no longer wanting (or able) to move into the buildings, as well as those providing short notice to move in with parents or relatives,” he said.

 

 

 

 

 

 

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