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Prepping your portfolio for apartment market slowdown

The numbers aren’t dramatic at this point, but apartment vacancies are increasing, rents are decr...

Apartment and multifamily buildings in Toronto. (Google Street View)

(Google Street View)

The numbers aren’t dramatic at this point, but apartment vacancies are increasing, rents are decreasing and more tenant concessions seem likely. As the recession created by COVID-19 potentially worsens, so could these issues for apartment owners and managers.

“Vacancies are going up and beneficial apartment owners have to get ahead of this early trend, and training frontline staff is the easiest defensive move to make,” said SVN Rock Advisors Inc., Brokerage chief executive officer Derek Lobo, who hosted a July 14 webinar on defending occupancies, rental rates and cash flows in the second half of 2020.

Despite the somewhat troubling indicators, Lobo remains bullish on the multifamily sector. He reiterated his belief fundamentals are still strong and new apartment construction is the best available development opportunity.

Lobo pointed out apartments have produced higher returns and less volatility than the industrial, office and retail asset classes over the past 10- and 15-year periods.

“Apartment cap rates haven’t changed in this new environment that we’re going through,” Lobo said, illustrating another sign of strength for the asset class.

Factors affecting the apartment market

Lobo believes apartments located in the downtown cores of larger cities are most at risk at the moment, due to concerns about high-density living and public transit created by COVID-19.

The pandemic has also brought condominium units that were previously used as short-term rentals for Airbnb and other similar services into the broader renting pool, owing to the collapse of leisure and business travel.

That, combined with a number of recently completed condo and apartment buildings coming into the market, has increased availability.

Data presented during the webinar shows the number of condo units in Toronto MLS listings spiked from about 3,500 to about 7,500 in April.

Economic uncertainty and dwindling consumer spending has resulted in tenants doubling up, or young people moving back home to live with their parents.

Foreign university students likely won’t be returning to Canada due to COVID-19 travel restrictions and uncertainty about the coming academic year.

Apartment rent prices and payments

Lobo said the Canada Emergency Response Benefit (CERB) program, which provides $2,000 every four weeks to applicants dealing with pandemic-related job hardships, has helped many tenants make rent payments.

However, CERB is due to end on Oct. 3, which could potentially cause money problems for some of the 8.25 million Canadians who have applied since March.

“March, April, May and June have all been way better than we thought they would be for collecting rents, so we’ll have to wait and see what happens once CERB is withdrawn,” said Lobo.

Class-A apartments with discretionary renters are affected first in an economic downturn and may drop their rents to spur potential tenant interest, according to Lobo. This causes a downward chain reaction where:

* top-of-class renters from class-B apartments move into discounted class-A units;

* class-B building owners lower rents to compete with class-A discounts;

* and class-C apartments adjust new rents to compete with lower rents in the class-B buildings.

“If you drop your rents in your A-class buildings, it’s going to take you years to get back to where you were,” said Lobo.

“If you have to drop your rent, you have to drop your rent, but you have to do it very methodically, very carefully and in a measured and circumspect way.”

Some apartment units outperform others

IMAGE: Derek Lobo

Derek Lobo of SVN Rock Advisors. (Image courtesy SVN)

Small one-bedroom units are renting better than large one-bedroom units, and small two-bedroom units are renting better than large two-bedroom units.

Lobo also said one-bedroom plus den units are renting well and increasing in popularity as more people are working from home.

Converting units from bachelors to small one-bedrooms, or from one-bedrooms to two-bedrooms, is a good strategy now when people are looking to save money, Lobo added.

Achieving 100 per cent occupancy, he said, can be achieved by landlords through:

* targeted marketing;

* a trained and motivated leasing staff;

* a compensation structure that fits the company’s structure;

* hotel-like adjustable pricing;

* ongoing training;

* and clean units and buildings.

While apartment owners can’t control their building’s location or dramatically change its class or rent, they can impact its property management and leasing platform.

SVN Rock Advisors completed a study that found a high correlation between rent collections and quality of property management through April and May.

“Good management led to better rent collection, and good management will similarly lead to better occupancy,” said Lobo.

Apartment Leasing University

Following its recent Apartment Developer University course, SVN Rock Advisors is launching Apartment Leasing University on Aug. 4.

The four-week, eight-session, interactive online training program will teach owners, property managers, leasing agents and frontline staff how to minimize pressure on vacancies, rental rates and concessions.

“Apartment Developer University was very successful, and this course was born from the feedback we got and what we learned about Internet training and webinars,” said Lobo.

“Training is important to recruitment, and the more the economy slips the more important that person you’re hiring is going to be, to protect and defend your occupancy, your cash flows and your vacancies.”

More information about Apartment Leasing University, and how to register, can be found on the SVN Rock website.

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