Where’s the Rent?

According to Moody’s 10 million Americans are behind on their rent.  And as of December 2020, according to the National Low Income Housing Coalition renters owe ~$30-70 billion in back rent to landlords.

The Center for Disease Control and Prevention (CDC) extended the federal moratorium on rental evictions due to a tenant’s failure to pay rent through June 30, 2021.  This decision is both good and bad.

The eviction moratorium is a vital protective public health measure.  The obvious positive impact of the moratorium is that millions of people who are unable to pay their rent can stay in their homes and out of crowded congregate settings, or worse.  Research has shown that it is easier to keep someone from becoming homeless than attempting to get them out of homelessness.

However, with each extension of the moratorium there is an increase in the number of landlords struggling to find cash to pay mortgages, taxes, utilities, and maintenance cost.  ~10 million individuals own one or two rental units and these individuals account for 22.1 million, or over 50% of the rental housing stock in the U.S. The hardship of no rental payments disproportionately impacts the small landlord.  Many of these small landlords are providing housing to the lower income market and the risk of these landlords filing bankruptcy or facing foreclosure could have a significant impact on the availability of affordable rental housing.

The passed COVID Relief (December 2020) and American Rescue Plan (March 2021) set aside a combined $50 billion in funds for state and local agencies to distribute to renters in arrears to pay their rent.  And as of now less than half of landlords and a third of tenants are aware of the rental assistance.

The federal government’s goal is to get the funds to renters before the eviction process starts in July.  To meet this goal local agencies will need to make both landlords and tenants aware of and encourage the use of the resources.  As with most things, success is found in the execution.

Multifamily Housing: What to Expect in 2021

The COVID-19 pandemic is impacting every aspect of our economy.  First it was the hospitality and travel industry; then retail; and now it is the real estate sector, more specifically multifamily housing.

According the to the United States Postal Service since the start of the pandemic ~16M people have moved.  Some people are moving back in with their parents and others are moving to rural co-living spaces.  CoStar data shows that many are moving to the suburbs where rents are holding, while rents are falling in urban and downtown areas.

All of this pandemic moving is having adverse effects on the multifamily housing (MFH) market.  Overall multifamily transactions have sharply declined due in part to the difficulty of securing site visits and inspections to complete transactions; lenders pulling back from debt and equity; and a growing uncertainty in the underwriting of future cashflows for income producing properties.  In addition, landlords are increasing their payment leniency requests of banks as the federal eviction moratorium significantly reduces their income available to cover loan payments.  As a result, financial lenders are starting to place MFH properties into their highest-risk categories.

In addition, we are experiencing an investment shift.  MFH investors are moving from the urban core to inner ring suburbs.  According to commercial real estate research firm Yardi Matrix since the start of the pandemic apartments sales in midwestern urban areas declined 41% while the decline is not as steep in the suburbs at 26%.

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COVID-19

Feasibility Research Group (FRG) is a privately-owned real estate services company specializing in commercial real estate appraisal, inspection, and research.  Like many small businesses, FRG has been impacted by COVID-19.

However, the services that we provide are deemed essential by most states and thus we remain willing and able to assist you with your appraisal services and market research needs.

FRG practices social distancing.  Currently, all employees are working from remote locations.  Further, if an FRG appraiser is conducting an on-site inspection he/she will practice social distancing during the subject property inspection.

The FRG appraiser conducting the inspection will:

  • Maintain six feet distance from all property contacts
  • Request that only one person accompany the appraiser on the inspection
  • Not touch any fixtures, door handles, light switches, etc in the facility
  • Require unobstructed access and views of the interior of the building
  • Wear protective covering including but not limited to gloves and face masks

Further, as much as possible FRG appraisers will seek to conduct virtual interior inspections leveraging technology such as Skype and/or FaceTime*.

FRG will continue to monitor the coronavirus and its impact very carefully and provide updates as needed.

 

*NOTE: USPAP does not require a physical inspection. Appraisal Foundation Statement

The Appraisal Foundation, Fannie Mae, Freddie Mac and the Appraisal Institute have deemed virtual inspections to be acceptable.

 

The Struggle to Find Home Sweet Home

As our MAI appraisers complete multifamily housing commercial appraisals and rent comparability studies (RCS) for HUD and private clients, FRG has extensive multifamily housing knowledge.  And as a result FRG has a great deal of interest in remedies to the affordable housing shortage.

I can still remember signing my first apartment lease.  I was 19 years old and excited to move into my very own 500 sq-ft, one bedroom, one-bathroom home.  Well it wasn’t all mine, because I could not afford the apartment, thus I had a roommate.  Even with a roommate, this was the first time I felt like a responsible adult.

Unfortunately, many today are struggling to find a place to call home.  Nationally, the number of renters has reached historic highs, and as a result it is becoming increasing difficult for many to find safe, quality affordable housing.  In fact, according to a Harvard University Housing Study the availability of affordable rental housing is being affected by:

  • High rental demand and low vacancy rates, which allow landlords to continually increase rental rates
  • Demand from higher income renters is driving the construction of luxury vs affordable multifamily rental housing

A recent Ohio Housing Finance Agency report that assessed the state’s housing needs noted that lower income Ohioans are struggling to pay for housing as they spend more than 30% of their income on housing.  The agency discovered that there are only 43 available and affordable rental units for every 100 extremely low-income renter.  And these extremely low-income renter households are typically made up disproportionately with seniors and/or small children.

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FRG Wins 5-Year Contract with HUD

Feasibility Research Group (FRG) selected to perform rent comparability and post-rehabilitation studies (RCS) for the Midwest Region.

University Heights, OH (August 12, 2019) — FEASIBILITY RESEARCH GROUP (FRG), a real estate services firm based in Northeast Ohio, has been selected to provide rent comparability studies (RCS) for multifamily housing properties in the Midwest Region.  The Midwest Region includes the following states: Illinois, Indiana, Michigan, Minnesota, Ohio and Wisconsin.

The US Department of Housing and Urban Development requires the completion of rent comparability studies in compliance with the latest version of Chapter 9 of the Section 8 Renewal Policy Guide.

“We are excited to work with the US Department of Housing and Urban Development” said Gregory Williams, MAI and FRG‘s Owner and Managing Director. “We are looking forward to helping to provide safe and affordable housing to communities throughout the Midwest.”

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My 1st Leadership Development and Advisory Council Session

For more than 85 years, the Appraisal Institute (AI) has been a global professional association of real estate appraisers.  AI works to develop real estate industry leaders and establish an appraiser presence in the United Stated Congress through its Leadership Development and Advisory Council (LDAC).  The Council is a group of dedicated appraisers who together once a year in Washington DC to generate solutions to challenges facing the appraisal profession.

Last month, I had the pleasure of attending my first LDAC session in Washington DC.  I entered with no expectations other than using it as an opportunity to learn more about the Appraisal Institute and offer up a thought or two on promoting our industry.  By the end of the week, I walked away from LDAC exceeding those expectations.

The LDAC discussion sessions afforded the opportunity to engage and brainstorm with appraisal professionals from all around the country.  The sessions served as opportunity for us to come together to generate actionable ideas to solve some of the appraisal industry’s toughest problems.  Serving as a member of the Ohio Chapter’s education committee I was very passionate about the education discussions. Based on my experience, I know that AI’s educational offering is superior to other competitive offerings.  Our group discussed ideas on how to not only get non-AI members to take AI courses but to also use our education offering to entice non-members to become members.

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Eminent Domain: What Options Do Property Owners Have?

As a MAI designated appraiser who completes right-of-way, acquisition and disposition appraisals, I have encountered a variety of situations where property owners are unaware of the complex process involved in a full or partial taking of private property. During this process, the appraiser can in fact assist the property owner in making sure they achieve the best possible outcome when selling their property to a government agency.

For example, once a state agency has determined that property is needed for public use, the property owner does not have an option to simply refuse the sale of their property. However, the government is required to ensure they compensate the owner fairly and cannot place any undue burdens or hardships on the property owners during this process. Thus, when the state claims private property through eminent domain, the property owner can have an impact on getting the best deal possible.

Here are some ways that property owners can make sure they are justly compensated, in the case of a state claim to their property:

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FRG Continues Expansion Into Mid-Atlantic Region

Feasibility Research Group (FRG) has been selected to provide Appraisal Services for the District of Columbia Housing Authority.

University Heights, OH (April 3, 2019) — FEASIBILITY RESEARCH GROUP (FRG), a real estate appraisal and consulting firm based in Northeast Ohio, has been selected for Appraisal Services with the District of Columbia Housing Authority.

The District of Columbia Housing Authority requires professional appraisal services to support its Office of Capital Programs.  The programs that FRG will support include the appraisal of mixed income, mix use development, public housing apartments.

“FRG looks forward to supporting the District of Columbia Housing Authority with their appraisal needs” said Gregory Williams, MAI and FRG‘s Owner and Managing Director. “FRG’s appraisals will support DCHA’s initiative to provide livable housing to support healthy and sustainable communities.”

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Small Business

Shortly after becoming a MAI designated appraiser, I founded FRG. The firm was built on a client base of strong regional financial institutions who needed quality commercial real estate appraisals for their loans and portfolio management. For a good three or four years that client base grew as banks provided loans to small businesses that were seeking to expand their own business. However, there has been a shift over the last twenty-four months, and I have noticed a flattening and decline of financial institution business lending.

I can’t say with 100% certainty the reason for the decline, as there is no one single reason for this shift. However, over the last couple of years I have observed some bank lending trends:

Shifting Geographic Focus to High Growth Markets
Several banks that previously held a strong presence in the Midwest have shifted their focus to higher growth areas on the east coast. One such bank is First National Bank of Pennsylvania; in 2015 and 2016 they stated that the Cleveland and Pittsburgh MSAs were focus areas for growth. However, as we moved into 2017 and 2018, their focus shifted to the mid-Atlantic and Southeast. First National Bank confirmed this shift in their 2017 Annual Report, stating that Raleigh, Charlotte, Winston-Salem, Greensboro, High Point, NC and Washington, DC joined Pittsburgh, Baltimore and Cleveland as the bank’s largest commercial regions .

Prioritizing Mid-Cap Companies over Small Businesses
Banks have been shifting their lending to mid-cap companies instead of lending to small businesses. A reason for this shift could be because it is more difficult to package loans under $1M into bonds that can be sold to a third party.

Bank Consolidation and Banks Getting Larger
In the past two years, there has been a great deal of bank consolidation. For example:

• The largest bank headquartered in Michigan, Chemical Financial Corporation acquired Talmer Bank, a less than 100 branch bank also headquartered in Michigan and recently announced a merger with Minnesota-based TCF Financial Corp resulting in the bank becoming one of the 50 largest banks in the country.
• The second largest originator of SBA loans for the state, Columbus, Ohio-based Huntington National Bank acquired First Merit Bank of Akron, Ohio

The Federal Reserve Bank’s Small Business Lending Survey reported that in the third quarter of 2018, there was 1.4% growth in large institution loans for commercial & industrial small business, while mid-sized and small banks decreased their loan activity by 4.2% and 1.5%, respectively. Smaller banks are more likely than large banks to lend to small businesses. Therefore, the consolidation of the banking industry, and the rising average size of lenders, might account for some of the shift away from providing small business credit. According to the Federal Reserve’s Small Business Lending Survey, small banks offer lower interest rates on fixed rate terms loans than large banks, meaning small businesses may be able to secure more favorable loan terms from a smaller bank as well.

These shifts in lending make it hard for a small business seeking funds to expand, buy equipment or secure a building to accomplish their goals. So where can these small businesses turn? Many businesses look to the federal and local government to secure loans when financing is unavailable or too expensive elsewhere.

One example of this is the SBA 7(a) loan program, which is the SBA’s flagship loan program.  Proceeds from 7(a) loans may be used to start a business or assist with operations, acquisition or expansion of an existing business. These loans can offer more “flexibility, longer terms and potentially lower down payments compared to other financing options.”[i]  The average 7(a) loan is ~$420,000. In 2015/2016 there was a peak in both the number of 7(a) loans and the dollar amount loaned to businesses nationwide and since 2016, the number of approved loans has declined across the US.

 

In the last six years in the Midwest, SBA loans have increased. However, these states diverge from the national trends with increasing dollars loaned since 2015. Ohio holds the lead in total dollars loaned, reaching over $930 million in loans approved for the FY2018.

 

Added barrier for small business success: 2019 Government Shutdown

For small business across the United States and particularly those located in the Midwest, SBA loans are critical to support business operations and growth. Unfortunately, the recent government shutdown resulted in many businesses unexpectedly losing out on funds or not being able to obtain the finances they need. For small businesses to succeed, they need to be able to plan for growth. This means being able to reliably pay for and invest in that growth. As a fellow small business owner, I understand how important access to capital can be – and as I have observed the shifts mentioned above in financing options for small businesses, it is more important than ever that political differences be put aside and we keep the government open to ensure needed funds can get into the hands of business owners.