COVID-19: Apartment Real Estate With Kris German #697

Bruce Norris is joined this week by Kris German. He is Vice President of investments in the LA and San Bernardino counties. He specializes in selling multi-family residential properties since joining RE/MAX Commercial in 2007. He constantly ranks among the top three commercial agents within the RE/MAX commercial national division over the last twelve years. He has been awarded every award RE/MAX has to offer. This includes the RE/MAX Hall of Fame Award, Chairman’s Club Award, Lifetime Achievement Award, and most notably the Prestigious Diamond Club Award in 2015, 2016, and 2017.  See below for full video and resources.  

Episode Highlights

• Why did Kris choose to get into the apartment sector of real estate?
• During the years of the crash, was there a year it affected the apartment world?
• Are there still a lot of apartments being built or scheduled to be built?
• Has there been a shift in the mood of the apartment owner from 2019 to today?
• Could there be a change in migration for California?
• What policies are in place to help a renter right now?
• How will Prop 13 play out for apartments?

Episode Notes

Bruce Norris: Thank you for joining us. My name is Bruce Norris, and today our special guest is Kris German. Kris specializes in selling multi-family residential properties since joining Re/Max Commercial in 2007. Kris consistently ranks among the top three commercial agents within Re/Max Commercial national division over the last 12 years. He has been awarded every award Re/Max has to offer: the Re/Max Hall of Fame Award, Chairman’s Club Award, Lifetime Achievement Award, and most notably, the prestigious Diamond Club Award in years 2015, 2016 and 2017, with a proven track record of over 200 successfully closed transactions accounting for more than $250 million in investment real estate. Kris attributes his success to client centered business based on hard work, honesty and unparalleled negotiating skills. What Kris’s clients have found is that regardless of market direction, Kris continues to successfully sell more real estate at higher prices than his competitors. In his spare time, Kris has been an active community leader working with high school youth through religious and athletic outreach programs. In addition, Kris is a contributor to philanthropic efforts such as St. Jude Children’s Hospital, the American Cancer Society, and annually provides a holiday celebration for Veronica’s Home of Mercy, a woman’s and children’s shelter in San Bernardino, California. So, Kris, we we welcome you to our show.

Kris German: Thank you. As you’re reading that, I’m thinking, gosh, who are we going to be interviewing today? Sounds great right now. Thank you. Thank you for having me.

Bruce Norris: Well, thanks for doing all the things that you do. Not just being successful, but, you know, directing some of that to people that have a need. So I do appreciate that. As you know, we’re kind of built the same way. So that’s cool.

Now, it’s interesting. When I got into real estate, it was 1980/81, and interest rates for a mortgage was 17 percent. And that kind of always clouded, or it it always made me think anything under 10 percent was good interest rates. Whenever you get into a market and it’s a certain way, you realize that just because it’s five percent interest doesn’t mean it’s always been. You just have a different perspective.

So you get into the apartment world in 2007. So, first of all, why apartments? Why did you get into that part?

Kris German: So in the commercial field, you have a senior agent or a senior teacher, someone that takes you under their wing, teaches you the ropes of the business. That gentleman actually was a good friend of mine from high school who went to college right out of high school, then from there, he went to work for a commercial firm and he specialized in multifamily. So basically because he did multifamily, that’s what I did. Had he done retail, I’d be doing retail today.

I was very fortunate. I didn’t know it at the time. Multifamily has just been more tried and true, not only for the investors themselves, but for us brokers in terms of consistent volume.

Bruce Norris: OK. Most people think of the crash that occurred in in real estate affecting single family homes predominantly. Was there a year where it also affected the apartment world?

Kris German: Yes. So I got started in 2007, and the standing joke always is that I get my license on Monday, and then on Wednesday, God in His humor decides the market should crash. That’s where I started, in the middle of that real estate downturn. I didn’t know a good market per se. I didn’t know the days of 2004 to 2007 when things were on the run up. We saw a change in values then. We actually just recently did a study trying to create some projections of what’s going to come out of this pandemic. And even then, values were off maybe by, on average, 15 percent. Now, of course, some communities have it harder than others, but even my surprise was 15 percent.

Since 2010, we’ve had a huge run-up in apartment values for many reasons. One of the major contributors has been the escalating rents. Rents have nearly doubled in some areas since when I first started the business, you know, one-bedroom, two-bedroom, so forth. That really has lent itself to that growth. We’re all talking free rent control because now with rent control, you can’t raise rents overnight, so that has stymied the market. But up until last year when we knew limitations were a strong probability that rent control was going to be in place, investors of multifamily saw things happen not only in their cash flow because of the rental rates, but also the appreciation factor.

Bruce Norris: You know, the boom for apartments, part of that came on the back of a lot of people lost their credit and went from owner occupants to renters. Would you agree with that?

Kris German: Sure. And I think that’s evidence because here we are, we have this economic collapse, and at least in the markets that we work in, tracts, which is a major portion of Los Angeles and San Bernardino County, vacancy may be at that time jump to five or six percent. It didn’t go beyond five or six percent vacancy. That’s because even though a lot of tenants were being hurt, you had a big, bad decade of tenants who left California to other states looking for work or, you know, depending on what city we’re talking about individuals who were day laborers and now go back to Mexico because there’s no work here. You mentioned this influx of people that unfortunately had to foreclose on, now they become tenants.

Bruce Norris: You know, in the last 10 years, single-family construction normally explodes from a downturn to a high point in price. Single-family construction is at about 30 percent of what would be a great year. But apartment construction has been a whole other ballgame. So I know that’s made up the difference. Is that ongoing? Is there still a lot of apartments that are scheduled to be built or are being built?

Kris German: Yes. So everything that I’m reading says that has slowed down. Again, in terms of us talking about new permitting, new projects, stuff that wasn’t already in the works. You know, rent control really throws a wrench in the motor on the projections of the values of these newly constructed properties. I think you’re going to see a slowdown of that, at least for the next few years. Obviously there’s a need if we’re talking about numbers of potential renters. But at the same time, there’s been a lot of legislation here of late that isn’t favorable to the developers unless they want to build, say, low-income housing or something like this. Interestingly enough, that new supply that we have had has impacted more like San Bernardino County versus L.A. County. Even for myself, as you know, I finish a project that your firm had helped finance and we took that property, renovated everything, and brought it up to speed. But, we’re competing with units that are sitting empty, and with these newly constructed property, we’re only asking a couple hundred of difference in rent because they’ve had to drop their asking rents to get their faith in full and they’re offering concessions. In contrast, in L.A. County, they’re building versus the standard 1960s mom and pop building. Sometimes they are asking double, and it’s a different tenant base. But here in San Bernardino and even in Riverside County, there’s more competition between the older supply and the new supply when it comes to forgiving in full.

Bruce Norris: If you had to grade the mood of the apartment owner, what has the shift been like from euphoria of 2019 to what it feels like today.

Kris German: I had a partner who would say BC, DC, AC – Before Corona, During Corona, After Corona. Right. It can be three markets here. Going in prior to the coronavirus, even though the writing was on the wall and the market was shifting, since 2017 values had stopped climbing. They hadn’t fallen or dropped by any significant amount. We also didn’t see these leaps and bounds that we had saw from 2010 to 2017. So the writing was on the wall. Then comes this virus, and so it has intensified the correction that we thought we would have had anyhow. If you had asked me that question mid-March, even last month, everybody was at a standstill primarily because they’re just worried for their own safety and watching as we turned off the economy and countries were basically seizing up for several weeks. It was definitely a watch and wait.

Here now over the last two weeks, not only in my personal business, but speaking with other agents that do a good deal of transactions, speaking with loan brokers who deal with several agents and talking to those that historically work with those agents that turn a lot of deals, the market is coming back. Investors now are maybe not more optimistic, but they’re just not as fearful as they were.

Bruce and Kris did a webinar on March 19th, and then the governor shut the state down on March 20th. From that shut down came a lot of legislation, a ban on evictions. Tenants almost were incentivized not to pay rent, or at least they read it that way. Landlords were bracing for impact of “what if half of my building doesn’t pay the rent.” Well, the reality has been in our study that landlords are collecting about 90 to 95 percent of their rent. I’m talking here, local L.A., San Bernardino County. The only area that might be different with the L.A. city is those tenants really have been encouraged not to pay rent and they have the whole rent strike and everything in L.A. City. It’s tough to be an owner there right now, but in general, rent collection was good in April, and it was good again in May. That has made investors feel good. Even after their tenants were being sold, they didn’t have to pay rent. Even after they were told that we can’t evict them, they still pay me. So this must be a solid investment. Now they’re hopeful; and not like everyone’s jumping into the market, but at the same time, they feel a lot better about it. And we’re starting to see some deal flow now.

Bruce Norris: So you don’t have people running out the gate saying get me out of here. That’s a good thing.

Kris German: No. No. I guess there’s a portion of individuals who are pondering it since obviously this is not done. My estimate is we’re just getting started in terms of the effects of what just happened over the last two and a half months or so.

Those individuals who had thoughts about selling and cashing out altogether are thinking “Well, gosh, you know, do I sell today?” “Will selling today mean that I pay 10 percent more on my equity versus a potential downturn towards the end of the year as the effects of the three trillion dollars that they just printed and the effect of people being out of work beyond the pay period for unemployment. I think those individuals are weighing their options here. But in most cases, people are about the same mindset in terms of their strategy.

Bruce Norris: Do you think there will be a change in migration for California? First of all, from where you’re living in an apartment, you’re close proximity, and also just for California in general, California losing more people because of this.

Kris German: Well, sure. I had heard about the migration issues, but it really is after having worked for you and learning a lot from you that we had paid closer attention to it. People that were already leaving the state because of the tax issues here; obviously, that still exists. Plus you have all the other issues on top of it. I think that’ll still continue to be the trend before looking for a more affordable housing and they’re able to seek it in states like Arizona or some of these other places. We’re not just talking about the older folks that are retiring, but, you know, people middle-aged or even those individuals that are in their first career. I was talking with a client whose son moved to Texas, and he’s in his early 30s. California will suffer from that.

On the other side of that coin, I’ve heard people say why it’s much to worry about nothing is because of the migration we had; and speaking with regard to apartments in the communities that we work with, the migration that you feel have of people from Latin America and so forth coming here, they’ll be the ones that fill up the building, even if you had an issue with people vacating and moving to other states. We don’t know yet when we run this data how that’s going to play out. But, of course, it’s something to watch.

Bruce Norris: What policies are in place to help a renter typically right now. You know, they could be an owner as well. But since you have apartments, mostly the renter, are they the recipient of some of these unemployment checks, and how long does that last?

Kris German: Thankfully, this time around with unemployment, they also offered it to what they call these gig workers, you know, self-employed individuals, and it was even for individuals who do real estate. Normally as a self-employed individual, you wouldn’t have access to unemployment. So the government opens it up for these other professions, and thankfully so because this could have been a lot uglier. I believe you get 30 some weeks of payments if I understand correctly, and I understand the checks are six hundred dollars or something a week. And I’ve heard the comment that some of these people are making more money on unemployment than they were making when they were working individual.

Bruce Norris: Now, the six hundred dollar check is actually the federal portion, right?

Kris German: I believe so.

Bruce Norris: There are two checks. There’s a state portion, and the federal portion is six hundred dollars. So combined, it can be a grand a week.

Kris German: Not a bad deal. And I would imagine for many of these folks that, you know, they’d rather be working, just for their own pride. For landlords, there’s not much help. The state basically has said, they won’t admit it, but what they basically have said is people are hurting economically. So landlords are going to give a loan to your tenants interest-free for anywhere from six to twelve months, depending on what city you own it. The reason why I phrase it that way is because if a tenant can prove that there’s been a loss of wages, unemployment, they took care of somebody that had COVID-19, they caught it themselves and another laundry list of reasons, that they can miss their rental payments while the stay at home order is in place. And then once the governor lifts the stay at home order, again, depending on where they live, they have anywhere from six to 12 months to make up the back rent.

In the interim, landlords just float these free rental payments. A real bonus is that the Judicial Council, on their own accord, at the same time decided they will not hear any eviction cases or process eviction for 90 days from the day that the governor lifts to see at home order. So let’s just assume life goes back to normal on July 1st or somewhere around there. The tenant then has missed, in some cases, the April payment, May and June. They could be up to three months behind. Then they have another three months they know that they can’t be evicted. So now we’re not getting into eviction court until September, October sometime. In many of these communities, do any of us believe that these tenants can make up two to three months of rent, or even that they will if they have six to twelve months of payout, that the landlords will see the money down the road? So when I’m asked a question, Well, Chris, where are values? As of right now, not much has changed other than there’s not really any deals going on. It’s just starting to pick up again. So we don’t know what COVID really meant for the apartment values as of yet. I think in August, I would have a better idea because we’ll be able to see those buildings that were listed for sale March, April, May. Where do they end up selling?

Long term now, we might have a situation where apartment owners, like those in L.A. city, might have to go several months without income, get hurt. You’re going to see where there’s going to be a need to sell. There’s potentially no help for landlords. All these loans, the PPP, the EIDL, and the others, unless they held title or a certain entity set up for management where they’re self-employed, then they could have that. Aside from that, there’s no government aid. They talk about how the state has a surplus. Many people were calling for some type of aid from the government. Instead of telling the landlords to just allow them to live there for X amount of months for free, why doesn’t the state step in ink and tax this pool of money and give them a rent voucher? Maybe not for the full amount, but something to assist the landlords. In the meanwhile, they have mortgages to pay and all the other goodies.

Bruce Norris: Do you have any concerns about any pending legislation or legislation that’s been discussed but not yet approved? I’m just curious if you have any thoughts on what you think might be next?

Kris German: Yes. So the main one is they’re putting rent controls back on the ballot this November. Obviously we have statewide rent control, but it’s a much stricter version that would limit rental increases to three percent annually versus what’s in place now, which is five percent plus the change in CPI annually. That’s what’s really worrisome to us because at three percent as even individual cities change, the trash carriers and other expenses go up, and even with the cost of living going up, it definitely fits into the rate of return that landlords, including myself, assumed we would have received over time. We’re projecting for future gains and other things down the road. So that’s what’s most worrisome.

It’s interesting because in October of 2018, we defeated rent control. We voted as a state and unanimously defeated rent control. Yet the governor and the other cronies with him said, We know better than those who voted. So now we have rent control and that’s in effect January 1st. The gentleman who originally put rent control on the ballot in October of ’18 is the gentleman who now has put a stricter version on the ballot for November. In his words, it’s because he feels that although we already have state rent control, the state didn’t go far enough and he knows better. And even the governor. And that’s where we are.

Bruce Norris: Well, what’s interesting about that is that even if we voted down again, it doesn’t mean they won’t convene and do it anyway.

Kris German: Yeah. I guess this isn’t the only issue where the government has gone against the will of the people, but it’s quite something to watch and be a part of.

Bruce Norris: Yeah. Prop 13. How do you think that might play out for apartments?

Kris German: This version doesn’t affect apartments, it affects commercial properties, but I imagine that will be the first domino to fall, and then they would come after residential. As of right now, it doesn’t affect multifamily properties and the clients we work with. But, of course, you know, brokers that work with clients who own retail and manufacturing and so forth, that’s not good news for them.

Bruce Norris: There was something floating around with a mandatory 25 percent discount on rent. What happened to that?

Kris German: Yes. So that was slated to be voted on, I want to say two weeks ago now, and I did some searching around the day of and the day after and a couple of days out there. I didn’t find that there was any final vote taken. As of right now, it’s up in the air. That was another doozy where somebody said, Well, let’s give the judge the authority right in the courtroom to reduce the rental rate by up to 25 percent if the tenant has had or can show proof that they’ve been affected by the coronavirus. For those in the tenant advocacy groups, to them, they hear somebody talking like me and they say “you’re heartless.” “What about the people they have been out of work, or even worse, were affected by the virus.” My question is, how does it beat the landlord’s responsibility to take care of another individual? How can you force philanthropy on these people to just essentially give a handout to someone they have no responsibility for? It’s ludicrous. And it’s even that much more appalling that the state is pointing the finger, saying, “Landlords, this is your problem,” yet at the same time not opening their wallets to at least assist in some shape or form.

Bruce Norris: I think what’s really also disturbing is that when you own something, you got there because you understood the rules of engagement. So this is how the rules work. I get it. I want to participate. And then in the last 12 months, there’s been a lot of rule changing where you didn’t feel like you had even a vote. So that’s concerning.

Kris German: Yeah, it has changed in structuring deals. Taking my realtor hat off and putting my landlord and investor hat on, you purchased certain properties with the assumption that the rents will go up X amount over time. I’m slating, one, for college since I have seven children. My eighth child is due a week from now. So I bought properties, took the risk, and put my money back on the line assuming that when my kids get in college I was waiting X amount of months for my properties and stuff to afford college for my kids and eventually then be able to pay for my retirement. Many landlords have the same story. You know, they’re either currently living off of their rentals as the vast majority of their apartment, or they’re accumulating property so that they will represent the vast majority of their retirement down the road. And now you just skew the numbers, and what you really have done is change their standard of living.

Going back to that legislation, they were proposing to reduce the rent by 25 percent. The best line of that whole piece was if a landlord owned more than 10 rental units, say 10 units of one building or two four units and a duplex, whatever the case may be, more than 10 units, the judge is to assume it would not be a financial burden for the landlord to allow for the rent reduction.

Bruce Norris: Well, I think that’s what bothers me most about somebody’s ability to write something like that and enact changes when you bought things under a different rule of law. If that’s going to be the trend that what we thought were the rules can be changed on a whim, that makes it very uncomfortable. It really does.

Kris German: With commercial loans, those who own commercial property know that typically these loans are fixed for three, five, seven, 10 years, and then they go adjustable or readjust to the current rate. You’re locked with the investors that bought a property three years ago with those rates. They knew that it would adjust. Now you cannot keep your rent up to fees because there are these new limitations that weren’t in place when you agreed to these loans. How is that fair? You might not have done that same deal had you known otherwise. 

Bruce Norris: It’s a funny thing, but if those loans adjust any time in the next 12 months, it will probably go down.

Last question. Whatever business was a year ago, and let’s call that business as usual, how long do you think going forward before we see that type of market and mood again?

Kris German: You know, it’s interesting, and we did a video piece on this as well. It’s interesting that in order to fight a respiratory infection, everybody went and bought toilet paper. That was really interesting. With that type of mindset, in terms of business as usual, it goes back to the psychology of the people. If “they,” meaning the powers that be, continue to present the narrative that this virus is more than what it is or if cities and counties like L.A. County, who just announced a week ago that they’re not going to allow businesses to open up until July 1st, now you’re killing that many more small businesses. They’re affecting the psychology, the sense of security that investors feel that is going to take that much longer. I realize that they’re having to weigh between the health of the people vs. the health of the economy. But if they play this game too long, we’re all going to get hurt from the economic side of it. Otherwise, most of us would probably would not be ok with catching the virus. But in other words, it’s not as much as we thought it was at the rates.

I would just point to that: What’s the sentiment of the people? If you look at the other side of it and say, well, no, it’s all financial. Well, look at it this way. I just mentioned a few minutes ago that 90 to 95 percent of tenants are paying. Well, we already factor in a three to five percent vacancy factor anyway. Interest rates, although they picked up a little bit for commercial loans, maybe they’ve gone up three-quarters of a point, are still historically low. That’s healthy.

Lenders, for the time being, have tightened the reins there. They changed some things. That’s one component of it, but in general, the financials are about the same that we had a year ago in terms of those things. But again, going forward, if there’s more fear mongering than what have you, that many more people will stand on the sidelines, and it becomes a supply and demand factor where if there’s not that demand then people need to sell. They have to float the building at a price that will bring those people out to buy.

If you ask me to put a timeline to all that, then I think most people want to see what the full ramifications are when you print three trillion dollars. What does that mean? I’ve heard people argue for hyperinflation. I’ve also heard people argue for deflation. So how does that play out? The other piece of it is they’re saying this virus could flare up again in the fall. So I think minimum, it’s going to be January or February before it seems still somewhat normal.

Bruce Norris: Now you typically hold public events. Are you thinking of doing one this year, or will that be pushed to next year?

Kris German: Yes. So, you know, during this Coronavirus, a lot of the education we’ve been doing for the landlords has been primarily video-based. Even the live event that you and I were slated to do, we had to switch back in a week’s time. Usually, we have our second event in the fall around October. I’ll have to make a decision by August what’s going to happen there, and I’m just going to really gauge it upon how we see people behaving in public. Are people comfortable going through restaurants? What happens with movie theaters and closed venues? If it seems like people are open to it and it wouldn’t seem as an insensitive thing if we held our event, then I’m all for it. It’s better than doing the webinar or something. But if we still sense that people would say it’s in bad pace with what’s going on, then we may hold off until the spring of next year.

Bruce Norris: Well thank you so much for your time today. Give us your Web site, if you will.

Kris German: Yes. So our Web site is theapartmentdealer.com. You can find us on Facebook, the same, the apartment dealer, YouTube, the apartment dealer, Instagram, the apartment dealer. Basically, type in the apartment dealer and you’ll find us everywhere.

Bruce Norris: All right, Kris, thanks for your time. Have a great week.

The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669.  For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.

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