Property Management Blog

FELLOW LANDLORDS FACING THE CORONA COMA: Update on “We Don’t Know What We Don’t Know!”

KRS Holdings - Monday, July 20, 2020

In our May Newsletter, I expressed the conviction that no individual and no institution have any idea where C-19 will take us, when it will end and what life will look like after the defeat of the Corona Coma. Likewise, I repeated that in our June Newsletter as well.

As a manageable planning horizon for residential landlords, my target is rental market expectations through 2021. In our last issue, I shared with you how things progressed regarding the first three of the eight top issues that we face as landlords … as I see them to be.

  1. Stimulus
  2. Unemployment
  3. Single Family Home Investment Opportunities
  4. Inflation
  5. Supply Chain Issues
  6. Eviction Regs
  7. Demonstrations/Protests
  8. Coronavirus Redux

This month, my intent is to share with you how things have progressed and real or expected impacts on the residential investment scene.

Inflation – Triggered by Items 4 To 8 Above, Plus …!

Based on recent inflation projections by the Fed, I’m cautiously offering a contrarian view of what the balance of this year and 2021 may look like for landlords.

At its June meeting, The Federal Reserve voted to hold interest rates steady at near-zero, signaling its intention to support a post-COVID economic recovery by keeping rates low at least through 2022. The Fed’s statement noted that financial conditions “have improved,” pointing to optimism of an economic recovery consistent with the agency’s intent to steer the economy back to its pre-pandemic profile.

The Fed report projected inflation at the following low and high rates for this year, 2021 and 2022.

  • 2020: .5% to 1.2%
  • 2021: 1.1% to 2.0%
  • 2022: 1.4% to 2.2%

The concern I have is the above projections are likely to be understated. While not being an economist or statistician, I do have some common-sense reactions as a seasoned landlord with several economic cycles under my belt … including prevailing during and following the devastation of the Great Recession. So, here goes.

Business Inflation Issues That Will Affect Residential Rental Investors

  • Businesses are faltering … with some failing. This triggers a decline in local and state revenues. This shortfall may be made up with a cut in services … not politically expedient. The more likely move will be an increase in property taxes … which equals an inflationary event.
  • Essential services businesses such as restaurants, gas stations and pharmacies all have been affected by C-19 with the upshot being a decline in business and the accompanying revenue loss. However, fixed overhead remains constant which leads to the potential of price increases to cover unchanged expenses. Price increases result in inflation.
  • Increased wage pressures may emerge to attract workers. If that proves to be the case, it will drive inflation. Rolling back bumps in wages is a non-starter.

A Federal stimulus “unintended consequence” that may aggravate this is employees who refuse to return to work because they are taking home more collecting the enhanced unemployment benefits than they would earn working. Another extension by the feds could add to this potential impairment to re-employment.

This generous expansion of unemployment benefits for C-19 displaced workers is scheduled to expire July 25 of this year. We’ll see. It’s early days in the recovery, but if history is any predictor of the future, it’s not unreasonable to expect government financial assistance to be expanded, not abandoned.

  • The cost of money is at an historic low with 30-year fixed rate residential mortgages at 3 percent or less. This will be attractive for “fence-sitter” home-buyers, while prompting sellers to increase prices … clearly fueling inflation.
  • Social distancing will continue to be a fact of life until an effective vaccine is developed and distributed to the public. The net effect will be less purchasing traffic for businesses, again with the potential to drive up prices. For we landlords, finding a new place to live could be a bigger problem than usual. In addition to many people out of work, social distancing orders prevent prospective renters to tour apartments and hesitant to meet landlords in person. That may result in rent increases to existing tenants just to meet increased operating expenses, taxes and vacancy factors … score another for inflation.
  • Supply chain Issues: It’s no secret … China is the primary source for many appliances, electronics and other kitchen and bath amenities. As trade tensions escalate between the U.S. and China, we may see upward pressure on building and replacement parts … driving prices up. Additionally, there may be the frustration of not being able to match uniform replacements, e.g. colors of appliances, sinks and toilets.
  • Eviction regs in Virginia have extended eviction proceedings. According to authorities, the moratorium is to give the state time “to implement its comprehensive rent relief program and to help relieve the public health risk associated with evicting Virginians from their places of residence.” We’ll see how that may play out with landlords having to make up for lost cash flow by raising rents for post-eviction tenants … yet another inflationary move.
  • Demonstrations/Protests are costly to property-owners who may suffer damages as well as taxpayers in general. Landlords will be faced with the prospect of increasing rents to offset replacement and repair of residential rentals trashed by mobs. Additional upward pressure to increase taxes will surely be floated by local and state governments to reimburse for public property damages. All inflationary events.
  • A Coranavirus redux would deliver a “wild card” if there ever was one. Who do you want to believe … the CDC, local officials, the WHO or ….? I profess absolutely no idea of potential or severity of a re-occurrence. If it were once again to result in sheltering-in-place, quarantines, employment furloughs/layoffs and extended social distancing, it’s anyone’s guess on the net inflationary effects for you and me as fellow residential landlords.

Takeaway

Stay alert and have a plan … albeit one that will be frequently revised based on events as they develop. Stay flexible. Planning is a process … not a one-time event.

As facts continue to unfold, I’ll be in touch to keep us all abreast of how to best prevail in preserving our investments, maintaining positive cash flow and helping our renters get through these next few months.