357: Eviction Problems or Not? National Apartment Assoc. Bob Pinnegar

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It's my pleasure to welcome Bob Pinniger to the show. He's a returning guest. He is president and CEO of the National Apartment Association. They are a trade organization representing the rental housing industry. Bob, welcome back. How are you?

I'm very good. Thank you for having me on again.

It's good to have you. And there is a lot going on in the world, isn't there?

Yes, there is.

So. And yeah, we got to kind of have a lighthearted attitude for it. It's so crazy. You know, there has been a lot of talk about the tidal wave of evictions coming at us. There's been a lot of talk about eviction moratoriums, people not paying their rent. How significant is this? You know, the media loves to sensationalize, as we all know. And at least from my chair, from our side of the industry, it seems largely overplayed. I'm just, I read it in the media, I hear about it in the media. But when I talk to our investors, it's like a non issue, the non payment of rents. Where do you stand on it?

You know, I agree with you. The media hype around this is only to further certain political agendas. I've had conversations with people who have one or two units all the way up to people who operate portfolios with hundreds of thousands of units in them. And it's unprecedented. That's a word overused this year. But the way the industry has worked with residents, from the standpoint of waiving light fees to allow people to pay in multiple payments throughout a month, to setting up payment plans, to working with residents because you know, at the same time the pandemic hit, the economy was shut down and there was an incredible concern out there what was going to happen to the industry and were we going to be able to survive this? And I think that to a large degree working with residents, operators have been able to fare far better than they would have had that not been the case. But there are out there. But we're working to try to solve those right Right.

So cooperating a spirit of assistance and cooperation, you're saying, is beneficial to both parties, right?

Yeah, yeah, definitely. I mean, we've been surveying our members and asking them questions in connection with a survey we do with Irem, and upwards of 80% of our of the members that we surveyed have been working with residents to keep them in place. Because we all know that evictions are lengthy processes, that this is not a high margin business. And one eviction could easily cost you the profit margin. You take the profit margin on three other units just to break even. That is not a viable business model. Can you avoid it? Because an eviction is the last possible recourse.

Right. So do you have any statistics you can share with us, like how you know what percentage of tenants aren't paying rents? What do we need to know about this? How big is this problem? We both agree it's overhyped, but there still is a problem there. How significant is it?

You know, there's been a number of groups out there that have been looking and tracking various information and data points. I was looking at some lease lock information just this afternoon, and they're looking at rent payments in the first day of the month. And so in November. Was there a November reporting period, the class a product saw 19% of rent payments received received in the first day of the month. And class C products, that's down to 13%.

Now, these are apartment complexes, right? Okay, so class A, you were dividing it. So class abc, it's different in different categories. So what's happening in class A in.

Class A, first day of the month, you're seeing about 19% of rent payments made in class C, that drops down to 13%, which is not surprising given the fact that in the class A products, these largely tend to be jobs that lend themselves well to working from home. And so people are able to work from home and be able to make ends meet. The class C product does have a larger challenge because this is really our naturally occurring affordable housing. And so a lot of our service workers who are probably underemployed or maybe not unemployed, as Covid is beginning to ramp up again as restaurants and hotels begin to close down. You know, these are the people that are facing the most challenge, which is really why we've been aggressively lobbying for direct rental assistance to help residents that are in this space that truly need assistance.

Okay, so that's interesting, and I definitely want to get there. So, you know, you talked about the first of the month. I mean, even in good times, a lot of People don't pay their rent on the 1st of the month, but what happens by the 10th of the month? You know, do you have anything you can share there?

Well, there's a, you know, there, there's a number of pieces of information that are out there that are looking at this. I know that the National Multi Housing Council has the Rent Tracker which has been looking at about a population of a little over 11 million rental units across the country. It skews arguably more towards the A and B class and they've been seeing that there has been some drop off from the standpoint of rent payments, but they're still relatively strong and things are in good shape. What I'm looking and trying to gather information on is that C class space because again, this is an older product which tends to be lower from a rent standpoint and tends to have people who are really struggling to make ends meet.

Now one of the things I predicted way back in February or March is that there would be some sort of national rental assistance program, whether it be an expansion of Section 8 and probably a pretty dramatic expansion of, of the Section 8 program that's been there for decades or some sort of a new program. And there's a lot of talk about universal basic income. You know, we've done shows on that previously. What type of rental housing assistance program do you think we need and what might we get?

Well, there have been versions of what you're talking about, but there hasn't been one comprehensive program from the federal level. So a lot of the CARES act dollars that were distributed across the country, you had various jurisdictions that put together assistance programs. Los Angeles did, Fresno, California did. We've had, Boston has put together programs. So there's a number of jurisdictions around the country that have put together programs based upon varying cases for need. The initial legislation that was put together with the Heroes act called for it to go through basically the homeless programs that are out there, which is very cumbersome. They tend to be small programs. They can't be ramped up easily and quickly to get dollars out. We're waiting to see what comes out of the negotiations that are currently occurring between the Senate and the House of Representatives as to will they expand that out to a wider pool of resources. Because if they allow the states to then put together a program where monies can be distributed, it's going to be done likely far more efficiently than mandating a one size fits all solution from the federal government all the way down to state and local levels.

So this would be an entirely new Program, not an expansion of Section 8. Right.

Likely it would be a new program. Because the challenge is that this is something that would likely be outside of the restrictions that Section 8 has in place. So you could have a much more business friendly model that allows for things to happen more quickly. The challenge with the Section 8 program is that has a very cumbersome process that is inconsistent from PHA to pha. And so you can be in one county and deal with two or three different public housing authorities, all of which have different requirements of you. And if we're going to get money out to people who need it quickly as possible, we're going to have to be more flexible.

And would these be direct payments to landlords?

The way it was envisioned was direct payments to residents and then they in turn could then make the payments to landlords. There have been various conversations about different ways, different scenarios that could occur. But the dollars that they receive would be earmarked specifically for rent. It wouldn't be that different than during a hurricane where vouchers are available for housing. The resident would receive them. They could then sign them over to the property owner and that would suffice for their rent. So they can be in place, they can survive the catastrophe and then move on. And hopefully we'd have the same thing coming out of this potential legislation.

But as a landlord, we would definitely rather see them come directly to the landlord the way Section 8 does.

Yeah, ultimately you would. But you know, this is the challenge with this is things are moving. They move slowly, then they stop, then they break down and they move quickly again. And so it's to trying to get this process moving forward was. It was the enemy of progress is perfection. I think we just need to get monies out there at this point in time and get those into the hands of people that need it. Because let's face it, what was it? July was when the stimulus dollars ran out from the CARES Act. And here we are in December and that Moody's.com had projected that by the time we get to January we could have potentially $70 billion in unpaid rent across this country. And that is okay, but.

But you know the problem with it, numbers like that, ah, drives me nuts when I hear the media or, you know, I see in an article they say $70 billion of unpaid rent. I don't. Compared to what, you know, I don't know how much is usually paid.

Well, if you look at trying to break that number down, it was. I saw one report that said it's on average about $6,000 per person is having a challenge. I know that their apartment list had done a report. I believe it was going into September. So going into the month of September, they estimated that 32% of all renters went into September owing some amount of rent previous, you know, and the challenge is if you get one month behind, you could probably dig yourself out of that. But if you are in a job saying less than making less than $50,000 a year and you get three months behind, it's going to be very difficult for you to dig yourself out of that in any sort of reasonable period of time. So our concern is that those lost rents for those operators that are in that situation, that working with residents could end up nothing at the end of the day if a bankruptcy is declared. On the other side of COVID Right.

You reminded me when you were talking about the program initially of. I think it was Milton Friedman's prophetic statement that said, you know, nothing is so permanent as a temporary government program. I'm sure you've heard that. It's. It's a great line. What is the, the thought about the temporary or permanent nature of this expansion of the rental housing program? Because I don't know that. You know, there are fundamental issues in our society that go way beyond Covid. I think Covid just exacerbated and accelerated a lot of these things, both good and there are some definitely very good things that are coming out of this, no question. You know, what do you think about that? Is, I mean, you know, the fact that it's not going to just be an expansion of Section 8. What does that tell us about it? Is it temporary? Is it permanent? Does maybe it becomes smaller? I don't know if any government program gets smaller, but, you know, maybe less people, they fall off the eligibility as the recovery occurs. What, what do you think about all that?

Well, you know, when the money goes away, the program will go away. And given the fact that what's being envisioned now is that the states would be running the programs, it would be an arm's length away from the federal government, which makes it more likely that things would wind down as we move beyond the crisis. But the challenge that we had before COVID that we're going to have after Covid, is that we had a housing affordability crisis going into this.

Oh, no question.

The industry can't build anything but class A product just because of the cost of development.

The construction costs make workforce housing impossible to build. You know, it's funny, you know, we. We do most of our work in the single family home side of the market in my company. You know, one, one of our contractors, a millennial, he kept watching all my YouTube videos and saying, well, I don't understand if developers know that there's all this demand from millennials and soon to be gen zers. He didn't say that, but I'll say it, you know, coming up. Why don't they just build for it? And I said, they can't. Economics don't work. They would be glad to build for it if they could, but there's just no way because there is so much government regulation in environmental impact, in construction quality. You know, you got to have every safety feature, all the, you know, water saving features, the energy features, the quadruple pane glass. This stuff costs money. Yeah. So what do we do?

And it's, you know, many of the regulations and rules around building today are the result of very good intentions, but nobody really looked at the cumulative impact of all of these various things that have now been piled upon our development community.

Yeah. So. So I think as a society, we need to ask ourselves, you know, from a citizen's perspective, is it better to be homeless or living in your car than it is to be living in, you know, what we would consider substandard building, you know, that's warm and hopefully clean and, you know, at least you can call it home. Right.

I mean, you know, if we were to address issues of density, address issues of artificial restrictions on housing, I mean, if we're, as a society, we're living increasingly in urban areas, which means there's more and more competition for that land. There's also been a large push of, you know, building on transportation corridors, but there's only a limited amount of supply there. And so the land becomes that much more expensive. I think we need to have a real conversation about density, about what type of communities we want to have, about the economic impacts, because if we continue to go down this road, you're not going to be able to have people working in the shops that you want to frequent. This is something that you see in very expensive communities like San Francisco and New York, where you have small mom and pop operations, dry cleaners, convenience stores, they're closing down because they're getting to an age where they can't run the store 724 and they can't hire people to commute the three hours total to come into work and to go home to be able to run the store. So we're seeing a change in our urban communities because we refuse to deal with this problem.

Yeah, but to some extent Covid and the civil unrest, the riots is solving that problem because people are leaving those areas. Thoughts on that?

I think they are. You're seeing that temporarily, but I think that people will ultimately return back to the urban cores. I think that what you're going to want to see more of though, is more mixed use. So if you have a town that has decided that everything downtown is strictly going to be office space and they're not going to have walkable communities, they're not going to have mixed use with apartments and other sort of things in the downtown space, those are the ones that are going to be challenged. And I think coming out of COVID where people have figured out that you don't need to be in the office every day to be productive, that we're going to see over the next 10 years a shrinking of office space. And as a result of that, there'll be opportunities to take some of these areas and revitalize them with housing.

Which areas? Urban areas.

In the urban areas. In the urban and in the near urban areas.

But that's been the trend for decades and those urban areas are still super expensive. And it's not always just the density driving the real estate cost. It's simply the cost of construction. I mean, you know, mixed use is super expensive to build because there's, you know, more regulations on that. So, you know, I don't know, I don't think the city holds that much allure anymore. I think once people, people discover, you know, that they can, they can work on zoom, you know, that a lot of the benefits of the city has really disappeared. You know, as soon as those, those playhouses close and, and the restaurants and all of that stuff. And I admit it will come back, but that's going to be a long slog. And I do agree with you in, in the, in the long enough term, whatever that means to where if prices come down in those areas a lot, which will be a hard fought, really, it's going to be pretty tough for maybe a decade. I don't know how long. Then I do think we'll ultimately see some people come back. But for the foreseeable future, I think the trend is away from the urban areas. I don't know. What do you think?

Well, I mean, in San Francisco, what we're seeing is you see rents dropping as much as 20% in the downtown core area. San Francisco, New York, same thing. So basically a two month reduction in rents. I think that you had a community in the millennial older Millennials that were probably within the next couple of years considering moving to more of a suburban environment. And I think that's accelerated that. But we also have Gen Z that's coming up right behind them and they're younger and they're going to want a more urban environment. I think that you will see things coming back. You'll see green shoots in urban areas. There's some downtown cities that are going to have more of a challenge than others. But when we had this revitalization of downtowns, there were some cities that were quick to change and there were others that were very slow to change. The conditions that brought people into those downtown areas, the walkability, they're still going to want that. I mean, we're sitting here in Arlington, Virginia. So we're three miles from D.C. and we have a shopping mall next to us that was in decline, that's been repositioned as a lifestyle center. We have office space. There's 1200 apartment units are going in all around us. Yeah. In the short term, is there some challenges with regards to rents? Yes. But will this area be revitalized right on a metro line? Yes, it will. And probably within a shorter period than we think, we'll see a recovery.

Bob, you said the shopping mall was redesigned into a lifestyle center. What is a lifestyle center?

So it went from a lot of retail that had been very run down to you have a theater in there. You have essentially an escape room type operation where people can come in and try to escape from whatever environment there is. A have drinks and paint area. There is. Okay, so it's that kind of stuff.

And also the entertainment. Retail. Entertainment combo, it's more retail entertainment.

So it's. It becomes its own magnet destination. And then you see land use change in the area around it.

Yeah. Yeah. Interesting. Well, I know we've got to wrap it up and you've got another interview coming up. What, you know, just give us any thoughts, any closing thoughts on anything. You know, it doesn't have to be about what we talked about, just whatever the association is working on, seeing, you know, what investors can look for in the future.

Well, I think rental housing is still going to be in demand. So if you're an investor and you're looking for, you know, where should I be putting my dollars? I think that rental housing is. Has been for the last decade plus your go to place and it's going to continue to be that. I think that technology, this advancement we've seen through Covid is going to continue to occur. And I think that Looking at new technologies and the way to do things more efficiently and more effectively are going to be the differentiators between the good operators and the great operators that are really going to be successful. So from that standpoint, I think that we need to look at investments in technology and really questioning, just because I always did it this way, is this still the same way I should be doing it? Because we had an almost 15 year easy upward run and I had conversations with many people that said, yeah, I might be able to make a little more money or save some money, but this doesn't really, it's not really broken yet, so I don't have to fix it. I think now's the time for those people who decide to reevaluate their operations and look at doing things more efficiently. I think they're going to be the ones that are going to really come out on top.

Yeah, I think you're right. And you know, just one final thing, sorry, demographics. You know, 10 years ago, back in 2010, I was saying on the show, the demographics coming at the rental housing market over the next 10 years are nothing short of phenomenal. And guess What? Now it's 10 years later and I've renewed that statement because we got another 10 years. That looks phenomenal to me. Do you agree?

I agree with you. The baby boomers are going to continue to downsize and move into rental housing and the new people coming out of school, you know, the Gen Z and whatever the gen is beyond that, I mean, we're going to see, we're going to see them continue to demand rental housing. They want subtly different things and what they're looking for, but overall there is more demand than there is supply for rental housing at that is not going to change anytime soon.

Yeah, couldn't agree more. And the website is nahq.org right?

Yes, that's it.

Thanks again for joining us.

Thank you very much.

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