LIHTC Occupancy Rates, Rental Income Remain Steady Despite COVID-19
The COVID-19 pandemic and resulting economic recession made at least one thing clear: Residents value affordable housing.
“Housing is important to people,” said Blair Kincer, MAI, CRE, a partner in Novogradac’s metro Washington, D.C., office and leader of the firm’s valuation practice. “They know that if they lose it, [the property owner] will rent it out to somebody else.”
Combined with the desire of property owners to keep residents in place and various government efforts to preclude evictions and grant rental assistance, the effects of COVID-19 on low-income housing tax credit (LIHTC) financed property in 2020 was not as bad as feared.
“It was better,” said Brian Myers, president at the Richman Group, the nation’s seventh-largest rental apartment owner. “We all thought there would be a substantial decline in rent collections … but in reality, it’s been a negligible decline, if not flat.”
Jack Sipes, partner and senior vice president of property management at Dominium, the fourth-largest provider of affordable housing in the United States, had a similar experience.
“In March , we were conserving cash and taking steps because we thought it would be a long haul,” said Sipes. “If you had told us it would be above 80% [in rental collection], we would have been happy. What actually happened exceeded all of our expectations for residents and financial performance.”
Sipes said rental income for Dominium dropped to about 90% and remained there.
“I think because people had to be at home, they valued homes,” Sipes said. “People said, ‘I’ve got nowhere to go. I’ve got to protect my home.’ The government stimulus helped, too. People paid their rents … they needed a place to stay.”
“The demand in this country for good quality affordable housing so far exceeds the supply,” Myers said. “What this pandemic has shown us is that if you’re one of the fortunate families with such housing, you will do everything possible to pay your rent. The stimulus programs and unemployment assistance likely helped many.”
Kincer said property owners have been generous.
“There have been a lot of payment plans that encourage people to stay in place,” Kincer said. “I think fundamentally, housing is an asset. I think people are smart. [LIHTC residents] may not say it in the same words, but they know they have an asset with below-market rent and they know if they give up the lease, they can’t retrieve that asset. I think there definitely is an understanding that affordable housing is a scarce resource and people who live in it treat it as such, so they’re doing everything they can to preserve that scares resource.”
A Repeat of 2020 in 2021
Kincer said the events of 2020 may be a preview of 2021.
“If you look at 2020, occupancy held up strongly,” Kincer said. “We would certainly expect that to continue with the fiscal stimulus from the federal government and having COVID become more resolved as the year unfolds.”
“We expect [a repeat of] what we saw in 2020,” Myers said. “We anticipate portfolio rental collections to hold up well with continued improvement as service-sector employment starts to ramp up again.”
The ability to increase rental income is influenced by the income limit figures HUD will release in April. But having an increase doesn’t always mean property owners will be able to raise rent.
“In terms of rent, the question becomes even if the area median income (AMI) goes up, can properties achieve that rent increase?” Kincer said. “Many states have moratoriums on rent increases and localities are interested in motivating landlords to not increase rents, either through mandatory processes or through pressure. The question becomes if [property owners] can economically pull off rent increases.”
In addition to economic issues, state and local jurisdictions provide pressure to keep rent stable.
“In Florida, where we have a lot of properties, the AMI went up in 2020, but the state asked for voluntary cooperation from property owners to not impose AMI increases from 2020,” Myers said. “I think that’s going to carry over and we’re very mindful about adjusting rent because of the hardships tenants are facing.”
Pandemic Effects Uneven
The COVID-19 recession is unique, according to Kincer.
“The [Great Recession] was more of a general recession, more of a general economic catastrophe,” he said. “It was felt by a lot of homeowners and the collapsing event was the portfolio of homes going bad. In this one, the recession is targeted so specifically, it hurts certain parts of the economy. It hurts people of color and the restaurant industry, for instance. Those eviction moratoriums had to be put in place.”
Kincer said the definition of median income is key to understanding the situation in 2021.
“If you think of how median is calculated, it’s the middle number, with half to the left and half to the right,” Kincer said. “Imagine you have the middle income, but maybe everybody to the left makes a whole lot less and everyone to the right makes a whole lot more. That didn’t change the person in the middle. We’re in a situation where income disparity is increasing. The median isn’t changing, the average income is changing.”
Sipes said this recession is different in another way.
“During the Great Recession, people came in having lost their jobs and said, ‘here’s my keys,’” he said. “This is very different. People still have jobs, but their income is reduced. Another big difference is that people are now at home and their kids are at home. Some people who would or could work can’t because they’re homeschooling their kids now. It makes it challenging for our residents and for our employees, who have been to work every day since the pandemic began. Until there is some semblance of immunity, it is difficult to see an improvement in the effects on all working-class people.”
Kincer said a big lesson from all recessions is that businesses can produce with fewer people, which is problematic for the workforce and ultimately for residents of affordable housing properties. Kincer cited some specific residents who may face problems going forward.
“Will we ever go back to shopping in malls like we did? Probably not in the way we did a year and a half ago,” Kincer said. “If you have a property that’s 25% retail workers, that might be difficult, but if you have 25% Amazon workers, how do you feel? What about restaurants or hotels? If you’re a property in Las Vegas, how quickly are people going to want to come back and gamble?”
Kincer said geography matters. Tourism may be quicker to return in some areas than others, meaning employment will ramp up quicker there.
“It’s very nuanced,” Kincer said. “Not only by industry sector, but by geography.”
Kincer said the federal response to the recession was better in 2020 than in 2010, but far from perfect.
“The government responded in a way that was more beneficial to the average American,” Kincer said. “Was it good enough? Was it fair? Time will tell us these answers.”
Optimism for Future
As vaccines are distributed and the light at the end of the COVID-19 tunnel becomes brighter, there is optimism.
“I’m still cautiously optimistic about the future,” Kincer said. “I’m cautiously optimistic that we’re going to weather the storm. We’ve seen a lot of good fact patterns and we’ve seen some fact patterns that if they turn south on us can become a problem. Pragmatism tells us we need to be cautious.”
Sipes is also optimistic.
“We’re hoping that summer is a return to some sense of normalcy, based on when a majority of people have the vaccine,” Sipes said. “Then our residents and employees can have some relief from the mental fatigue. But we won’t know until we get there.”
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