Monday, June 1, 2020

HFO Multifamily Marketwatch - June 1, 2020

This week: Landlords grow concerned over the upcoming end of increased unemployment benefits; King County sees mixed results from homeless hotel housing as Portland mulls a similar plan.


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According to the National Multifamily Housing Council, 90.8% of renters were able to make full or partial rent payments by May 20th, an improvement over April despite the continued economic downturn that has led to unemployment rates reaching nearly 15%. A survey of apartment owners in Oregon and Southwest Washington found that just 9.46% of households were unable to pay rent in May. In the city of Portland, over 94% of renter households made a payment last month. But industry experts warn that renters may be relying on the extra $600 per week the federal government is providing for unemployment to pay rent. This boost to unemployment benefits is set to end in July, which could mean landlords will see a drop off in rent collections in August or September. According to CoStar, institutional apartment investors are already seeing a sharp increase in the number of tenants requesting rent deferments or payment plans. Rent collections appear to be strongest at high-end and subsidized properties. Landlords and property managers are continuing to lobby state and federal legislators for increased funding for rental assistance. Last week the Seattle Times’ editorial board called on the Seattle City Council to provide monetary support to renters and landlords to ensure mortgages, utility bills, and property taxes continue to be paid, as well as to ensure housing stability for renters.
Washington Governor Jay Inslee has approved 21 counties to advance into Phase 2 of his four-phase plan for reopening. Under Phase 2, high-risk populations must continue to stay home, but outdoor gatherings of 5 or fewer people who are not in the same household are permitted. Also, manufacturing, construction, in-home domestic services, retail, real estate, professional services, and personal care businesses can resume operation, and restaurants can operate at less than 50% capacity. Remote work continues to be encouraged for offices that can facilitate it. Spokane is the most populous county that has been approved to move into Phase 2. The approved counties are mostly along the Idaho border, though some western Washington counties, including Grays Harbor, Lewis, Wahkiakum, Cowlitz, and Skamania, were also approved. To meet eligibility, counties are required to have fewer than 10 new COVID-19 cases per 100,000 people for 14 days. The Seattle Times reports that King, Pierce, Snohomish, Yakima, Benton, and Franklin counties are the farthest from reopening. Clark County is eligible to apply, though its application is on hold while a recent outbreak at a food processing plant is being investigated. While over half of the state’s counties have now moved into Phase 2, these areas represent just 17% of the population.
Despite widespread economic turmoil that has forced mass layoffs and business closures, many tech companies have been embracing the shift to remote work. Facebook has announced that its employees will be able to work from home until at least the end of the year, and is unveiling plans to expand its offices in several cities outside of its Silicon Valley hub. A recent survey of Facebook employees found that 20% of the company’s current workforce is extremely or very interested in working from home even after the pandemic ends. This opens up new possibilities for the company, which has some satellite offices in tech hubs across the country but tends to be located in areas with high costs of living. The tech giant is focusing on Portland, San Diego, Philadelphia, and Pittsburgh for the first round of expansions. But CEO Mark Zuckerberg is not limiting his search for new talent to people who already live in the metro area. In his announcement, he made clear that the company will be recruiting talent from within a 4-hour drive of these cities, arguing that hiring people from a variety of places will bring fresh perspectives to the business. In Oregon, this could mean Facebook will take applications from residents of Corvallis, Eugene, Bend, Hood River, and many other areas well outside of typical Portland commuting distance.
The Seattle Times reports that a new King County program that houses homeless residents in vacant hotel rooms is having mixed results, as Portland’s Joint Office of Homeless Services proposes a similar plan. For many of the homeless individuals in the hotels, the program has been life-changing – some have been able to get free of addictions, and the number of fights, overdoses, and violent outbursts at the hotel is far lower than is typical at area homeless shelters. County officials are also finding that more people are staying in their hotel rooms rather than wandering around on the streets. Also, the program appears to have significantly mitigated the spread of coronavirus in vulnerable populations. There has not been a single confirmed case among the 200 people who have been tested at a hotel in Renton. The county estimates that housing 600 people at hotels through mid-May cost $2.7 million. But local business owners and the Renton Police Department believe the program may be hurting the surrounding community. Renton business owners find a recent uptick in shoplifting incidents is tied to the increase in homeless residents living in the community. And while there have been just 60 9-1-1 calls from the Renton hotel compared with 105 at a comparatively sized shelter in Downtown Seattle, the Renton police force is much smaller than Seattle’s and unused to the high volume of calls. In Portland, the Joint Office of Homeless Services is urging the city to spend nearly $40 million to house homeless residents in 495 motel rooms with wraparound services until there is a vaccine for COVID-19. The elderly and immuno-compromised would be prioritized. The Mayor and members of the City Council believe the price may be too high, however, and are considering alternatives like temporary housing units or existing vacant spaces such as the old Greyhound station in Chinatown or the Concordia University campus. Council members believe if the city plans to spend such a large amount of money, it should not just go to temporarily rent space that it will not be able to utilize in the future.
The LA Times reports that people who are looking to purchase homes amid the COVID-19 pandemic are finding it harder to get a loan. Lenders across the nation are becoming more cautious, requiring larger down payments and higher credit scores. So-called “jumbo” loans appear especially hard to come by. Also, banks, including JP Morgan Chase and Wells Fargo, have stopped issuing home equity lines of credit for existing homeowners. The Mortgage Bankers Association’s Mortgage Credit Availability Index is at its lowest level since December 2014 after experiencing a 12% decline between March and April. Although mortgage rates remain historically low, fewer home buyers will be able to take advantage of these rates due to the decrease in credit availability. Banks appear to be hedging against an expected increase in mortgage defaults as unemployment benefits dry up, and the economic crisis continues. Banks are already severely limiting the number of non-QM mortgages, which are typically utilized by self-employed home buyers. Joel Kan, Vice President at the Mortgage Bankers Association, expects overall mortgage lending to return to conditions not seen since 2011. Zillow expects home values to drop by 2-3% as a result of tighter lending standards and economic uncertainty.
Seattle-based aerospace manufacturer Boeing, which was already having a challenging year before the coronavirus pandemic, announced last week that it is in the process of laying off nearly 12,300 workers, almost 10,000 of whom work in the state of Washington. Boeing sent layoff notices to 6,770 workers last week and offered voluntary buyouts to an additional 5,500 workers. CEO Dave Calhoun cites the pandemic’s impact on the global airline industry as the primary reason behind the layoffs. At its peak in 1998, Boeing employed 98,440 workers. That number had declined significantly by 2003, but by 2012 company employment numbers had considerably rebounded, reaching 86,480 before falling again. Over the last two years, employment had been up slightly, but projected total employment at the company for 2020 is now under 62,000 workers. Boeing expects to cut an additional 4,000 jobs globally over the next few months. Many of the cuts will be for high skill, high wage jobs. Thomas Gilbert, a professor of finance at the University of Washington, told the Seattle Times that these cuts will be a permanent loss to the local economy.
Josh Lehner, an economist with Oregon’s Office of Economic Analysis, predicts that the pandemic could result in a sharp decline in in-migration. He predicts that there will be 34,000 fewer people than expected living in Oregon by 2030. He also believes state revenues will be significantly impacted by a decline in liquor and lottery sales in addition to slower population growth. In the near term, he expects state revenues to decline by $2.5 billion over the next biennium. Lehner balances his dire predictions by pointing out that the state was in an excellent financial position before the sudden downturn. The education reserve, rainy day, and general funds can all be used to cushion the blow and shore up essential programs. He also argues that Oregon will fare better than states with a higher dependence on tourism, leisure, and hospitality, which face a tougher road to recovery. Still, he believes that it will be at least a few years before Oregon’s economy will be able to bounce back from the pandemic-related shutdowns. The prevalence of smaller businesses, especially restaurants across the state, could lead to a higher number of business closures. And coastal counties that are more dependent on seasonal travel have been harder hit, and will likely take longer to recover.
Finally, BisNow reports that the pandemic-related economic downturn and stock market volatility have kindled renewed interest in the Opportunity Zones program, which was established as part of the Tax Cut and Jobs Act of 2017. Although uncertainty in residential and commercial rent collections has caused some property owners to hit pause on plans for buying and selling assets, opportunity zone investment activity has remained steady. Opportunity zone fund managers report an increase in fundraising in addition to transactions. The 10-year time horizon for the program—which seemed riskier to some investors when the economy was booming—is now being viewed as enough time for the country to weather the current downturn. Jeanine Blake, co-principal of Opp Zone Capital, believes at least some of the new interest in opportunity zones is coming from investors who pulled money out of the stock market amid the economic turmoil but are eager to avoid paying taxes on capital gains. At the same time, that investment is up, construction costs are beginning to trend downward, which could enable some projects that have been struggling to pencil out to finally move forward. Opportunity Zone investors have also started to step in to shore up plans that have lost funding from more traditional sources. Michael Wiener, a Tax Partner at Greenberg Glusker, points out that many investors anticipate an increase in taxes as local and state governments work to stimulate their economies. The promise of tax forgiveness at the end of a 10-year hold could insulate opportunity zone investments from some of these costs.

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