A Message from AAGLA’s President: Deterioration or Opportunity – What’s Ahead for Us?

Industry News,

We had all benefited from a 10-year growth run in the apartment industry – sadly, all good things must eventually come to an end. What goes up, must come down. It was one “hell of a” streak, but business cycles do occur and downturns must be expected. However, who would have ever thought that a global pandemic would spoil a strong economy and the unprecedented streak of rent growth.

As I write this, COVID’s lockdowns are continuing, and closed retailers, restaurants, movie theaters, airlines, bars, and many other businesses are occurring across California and in other states, in addition to layoffs, pay cuts and furloughs harming employment and our tenants’ ability to pay rent. Rental housing providers have helped, voluntarily or under duress, to “bridge the gap” by not collecting rent, offering payment plans, waiving fees and other strategies while government assistance in the form of rental relief has been inadequate or not directed at helping landlords experiencing dire financial conditions today. Hopefully, none of this will last forever.

Despite it all, for the most part, the apartment industry has held up. But now, there were some signs many of us have began to struggle. Following, for some, nearly a year of struggling to collect rent, keeping up with ongoing financial obligations has become a challenge. So many of us today are seeking or thinking about seeking from their lender a loan forbearance following decades of on time mortgage payments and strong credit scores. Some of us have already received foreclosure notices and are on the cusp of financial doom and gloom. Others are not quite there having liquidated significant retirement savings and emergency funds merely to stay afloat but cannot hold on much longer.

In today’s global pandemic rental market, housing provider not only face challenging rent collections, but have been besieged by lease breaking tenants who, with or very often without notice, abandon their units to avoid mounting rental debt, and seek less expensive accommodations such as roommate situations, smaller units, or even moving back home with mom and dad at times, as a 30’s or 40’s something adult. Today’ rental market is one of higher vacancy rates that have increased from a typical 2% to 3% in urban areas to high single or low double-digit rates, with the time required to fill a vacancy extended to 60-days or even 90-days in some cases, and with owners under pressure to reduce rents charged or offer incentives such as free rent. This is the wrath brough upon us by government’s response to the global pandemic – we did not cause this although we have become the victims of their response.

Some apartment industry experts are predicting further degradation of rental and occupancy rates over the short to mid-term as the pandemic continues and we await vaccinations that can hopefully put things back on the old normal track, and not the “new normal” we have grown sick and tired of hearing about. Until we are past this, the trends of Californian’s fleeing urban areas and California entirely will continue as will continued work from home situations – remote work from home, may in fact, be here to stay.

It is hard to know precisely how things will shake out for us in 2021. But, for those of us that are not facing financial stress and that have ready capital or access to capital, 2021 and beyond could be a period of great opportunity. Acquisitions and development opportunities may exist for the “some” that have endured the global pandemic with lesser financial recourse. However, for the majority of us and California’s housing crisis, the events of the past year can only spell “gloom and doom” for rental housing as more and more small owners who have typically provided the bulk of rental housing and affordable housing make the decision to leave the business. All that has transpired over the past year can only have a negative impact on lenders to our industry who no longer trust our rental income when the government can merely modify, seemingly at a whim, our rental contracts and impede upon our ability to collect rent and enforce provisions negotiated with our renters.

At the onset, in early 2020, it looked as though we could look forward to another in a string of healthy years for the apartment sector. Sadly, the pandemic’s stay-at-home orders soon hit us and as a result, the multitudes of knee-jerk regulations put in place to address the pandemic caused a strong downward impact on leasing and sales activities.

The conditions we face in the Greater Los Angeles Area could easily be far, far worse such as markets like the San Francisco Area that has seen rent decline pushing 30% or more and massive vacancies as the tech industry flees for safer ground and escape from a growing homelessness problem, crime and lacking city services. While many regulatory risks exist today and will continue for the foreseeable future as extensions of eviction moratoriums continue along with the inability to raise rents on renewals, charge interest or late fees, we see more deterioration and financial challenges ahead for the State’s housing providers.

They say “hope” is no strategy, but faced with today’s global pandemic, “hope” is all we have. So, let us hope that vaccinations are delivered quickly and we get as far back to the old normal as quickly as possible. For some, there may be buying opportunities, but for others, there may be more financial stress and possibly financial ruin. It is government’s job to solve housing our communities during a time of crisis. As housing providers, we have gone about as far as possible. We have given “at the office” for a year now.