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Apartment Owners See Expenses Rise, Revenues Fall As Pandemic Wears On Budgets

Multifamily owners might have been spared the pandemic pain of their retail and hotel peers, but 11 months into the coronavirus pandemic, they have been beset by rising maintenance costs, rent concessions and tenant turnover, eating into their margins and stretching their budgets.

An employee disinfects a common area inside a Bozzuto-controlled apartment community.

Major multifamily REITs like Mid-America Apartment Communities, AvalonBay Communities, UDR Inc., Camden Property Trust and Equity Residential reported year-over-year property expense hikes of 2% to 8.4% during the fourth quarter of 2020, all while they have seen drops in rents and occupancy at their large, urban properties.

The Bozzuto Group, which manages close to 80,000 units, says expenditures rose across the board for all multifamily operators in 2020, particularly from cleaning and maintenance expenses.

"With the pandemic and more people staying at home, you have full buildings at 95% occupancy or so (during the day)," Bozzuto Management Co. Senior Vice President of Operations Pei Pei Mirabella said. "With everyone forced to be at home, there was an increased cost in cleaning and in making sure inside the common areas there was the perception of seeing people actively cleaning spaces and public areas frequently."

Bozzuto allocated more funding last year to the purchase of pandemic-related signage, desk shields for staff, personal protective equipment to keep staff and residents safe, and on equipment to provide higher-touch cleaning and sanitation services on-site, Mirabella added.

RangeWater Real Estate, which controls about 150 multifamily properties in the Southeast and Southwest, also noticed an escalation in technology-related expenses last year, as it rushed to invest in apps and equipment to conduct virtual tours and remote events for residents.

"We changed from being 100% in person with our tours to doing things virtually and having to learn that world and that technology," RangeWater Senior Director of Property Management Kristyn Monticup said. "We switched from having resident events to learning how to do things virtually, and that did come with an added expense."

Bozzuto Senior Vice President Pei Pei Mirabella

The financial cost of providing tenants with more cleaning, maintenance and technology services cut into net operating incomes at some of the nation's largest REITs during the fourth quarter of 2020.

MAA reported a 6.9% year-over-year rise in property operating expenses in Q4 2020, blaming the increase on real estate taxes, personnel costs, and utility and insurance expenditures. 

Property revenues at MAA managed to increase 1.8% year-over-year, but they were still outpaced by the growth in expenses. As a result, the firm saw a 0.9% year-over-year decline in net operating income in the fourth quarter of 2020. 

"There were definitely challenges from both sides of the equation — the income and the expense side — when dealing with COVID," Senior Managing Director of Investments for Marcus & Millichap's Multi-Housing Division Al Silva said. "On the income side of the equation, you had higher bad debt expenses with the eviction moratoriums and things like that which depressed revenue. And, on the expense side, your utility expenses went up because people were home more often."

Renter turnover and increased concessions on the revenue-generating side of the business also hindered multifamily REITs' ability to make up for rising operating expenses. 

UDR Inc. saw a 4.8% increase in expenses, but with its fourth-quarter revenue down 5.9% from the previous year on lower occupancies and growing tenant concessions in urban core markets like New York, San Francisco and Boston, its NOI fell 10.1% from Q4 2019 to Q4 2020. 

Equity Residential reported a 2.8% year-over-year jump in expenses across its 76,535-apartment portfolio in Q4, while its total revenue and NOI for the same time period fell 8.2% and 12.9%, respectively. 

EQR, which has a heavy portfolio concentration in California and Northeast markets, saw its turnover rate grow from 10.7% at the end of 2019 to 13.4% in Q4 2020. Its occupancy rate dropped to 94.2% compared to 96.1% a year earlier.

AvalonBay Communities faced similar headwinds to Equity Residential, with the REIT reporting a 5.8% rise in operating expenses for its established communities between the fourth quarter of 2019 and 2020 and a 14.3% drop in NOI.  

The Bozzuto Group invested heavily in personal protective equipment, masks and desk shields in 2020 to keep apartment common areas safe for tenants and employees.

AvalonBay and EQR, in particular, faced greater headwinds last year, since their portfolios contain a higher concentration of properties in urban areas heavily impacted by coronavirus-related restrictions and population declines, Piper Sandler Senior Research Analyst for REITs Alexander Goldfarb said. 

"The biggest difference when it comes to an Avalon Bay or an EQR is that they are continuing to see declining rents in their major markets and are exposed to the San Franciscos, Bostons and New Yorks, and so far, only a few bargain hunters are starting to come back [to those markets]," Goldfarb said. 

Unlike Avalon Bay or EQR, Houston-based Camden Property Trust faces a smoother transition into 2021, with most of its apartment assets situated in economically thriving Sun Belt states and its units priced in the more affordable $1,700 to $1,800 per unit range. 

“Camden is in a great spot relative to the big coastal markets because the Sun Belt never shut down, so they didn’t have the mass exodus of urban [core renters] that we’ve seen in New York and San Francisco," Goldfarb said. “It’s actually been incredible because Southern California, or LA, has been their only pressure point. The rest of their portfolio is pretty much back to normal."

Even still, Camden's well-positioned portfolio hasn't spared it from some of the financial strains caused by the pandemic. The REIT reported a 0.1% year-over-year drop in fourth-quarter property revenue in 2020 along with a 4.6% decline in NOI and an 8.4% increase in expenses for the same time period.

"Camden did have $14M of COVID-related expenses in 2020, but we view the majority of these to be one-time [costs]," BMO Capital Markets Equity Research analyst John Kim said.