COVID-19 changed the commercial real estate investing landscape in 2020. Heck, Boise, ID, of all markets, experienced the greatest rent growth one year into the pandemic of 16%.
Now that we are over a year into the pandemic-induced recession, many commercial real estate experts are offering their advice on how you need to change your investing approach. One firm that is leading the way in providing such insights is Real Page.
Greg Willet, Chief Economist at Real Page Inc., was a featured speaker at this year’s Best Ever Conference. In his presentation, he outlined six investing and operational strategies to implement in 2021.
One of the best strategies for 2021 is to get in front of the renter demand by focusing on markets that performed well throughout the COVID-19 pandemic. ApartmentList.com is a good resource that tracks rents across the nation on a monthly basis.
Many markets in the Sun Belt region (southern US from southern California to Florida) performed well since the onset of COVID. In fact, with the exception of the major MSAs in California and Texas, New Orleans, Nashville, Orlando, and Miami, basically all Sun Belt markets experienced rent growth rates greater than the national average of 1.1%.
Also, don’t rule out the Midwest. Outside of Chicago, Minneapolis, and Cleveland, the other Midwest cities posted positive rent growth rates in 2020 (most exceeded the national average, too). Demand is not as strong as it is in the Sun Belt regions, but low supply in the Midwest will drive demand in 2021.
Historically, when a recession occurs, top-tier Class A products discount their rents. As a result, “flight-to-quality” occurs – the lower rents of Class A products attract renters which boosts occupancy. However, during the COVID-induced pandemic in 2020, these rent discounts did not result in an uptick in demand to the extent experienced in previous economic recessions. Instead, renters have had the tendency to move down and downgrade to Class B and Class C products to save money. This trend was also expedited by stay-at-home orders with people moving from expensive urban areas to the less expensive suburbs for more space at a lower rate.
Similar to not banking on “flight-to-quality,” don’t pursue large value-add opportunities either. Hold off on the bells and whistles and focus on maintenance issues and the appearance of the asset. In doing so, the asset will be more affordable to a larger group of renters.
Another benefit of this approach is your ability to turn around a vacant unit faster (or keep the existing resident) with a lower quality upgrade. This will boost occupancy and support resident retention at lease expiration. Plus, the lower quality upgrade will leave money on the table for a future buyer.
It is the right time to adjust the recipe for your operational “secret sauce.” You do not want to be doing what worked well in the past. You want to be doing what works well now. For example, testing and measuring the success of technology at your properties.
Millennials overtook Baby Boomers as the US’s largest population in 2019. So, pay attention to what young adults are doing and how it impacts the types of units that are in demand. Then, determine how this impacts your marketing needs because certain marketing strategies are better and worse based on what is in demand.
The bottom line is to measure everything to see what is different now compared to two years ago.
Since the onset of COVID-19, there has been large variability in renewal rates across the country. However, you must make it a priority to hang on to the good residents who are making their full payments on time. Taking a hit on rent on a renewal lease might be a good thing if it is a high-quality resident.
Pay attention to the type of units with lower and higher renewal rates and ask yourself, “Why aren’t they renewing?”. It may not be the rental rate or other fees, so focus on the non-pricing factors, like maintenance and customer service.
Know what you are selling and who the target for your product and message is in this marketplace. The overall message should focus on service, appearance, ease of living at the property, the location – don’t focus on price.
Focus on the markets that outperformed the national average in 2020, especially the Sun Belt and Midwest.
Consider avoiding top-tier, Class A+ and Class A products since many renters elected to downgrade to Class B and Class C in 2020.
Instead, consider a low-cost value-add strategy focused on addressing deferred maintenance and appearance issues.
Test out new operational strategies to determine what works today because what works now didn’t work two years ago.
One of the best operational strategies of 2021 is to retain your high-quality residents, even if it means not increasing their rent at renewal.
Focus your asset’s branding and marketing on lifestyle-related factors instead of pricing factors.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.