At Birgo Capital, our funds were established based on the thesis that workforce apartments represent a uniquely compelling risk-return profile. During good times, values move slowly but steadily up and to the right. But during a downturn, something interesting happens – as people cut costs and foreclosures rise, families downsize from homes and costlier units to – you guessed it – workforce housing. This makes the asset class a counter-cyclical product, and, for risk-averse investors like us, an almost magical place to allocate capital.
Enter COVID. A worldwide pandemic that brought the global economy – and the blue-collar jobs that support the workforce in particular – grinding to a halt. An asset class that seemed all but bulletproof now seemed particularly precarious – the virus seemed to be the Achilles heel of moderately priced apartments. After all, I am writing this article from my nicely appointed home office – most residents of Class B apartments do not have the same luxury.
However, as the situation progressed, our perspective began to brighten. April collections far exceeded our expectations, while May and June’s collections were the best of the year. The Corona-tsunami was shaping up to be more like a tidal wave.
What happened? Aren’t unemployment figures at historic highs? Wasn’t everyone supposed to stop paying rent? Aren’t we in a recession?
Yes, yes, and yes. However, during the pandemic, the investment world discovered something. While occupants of workforce housing have undoubtedly been affected by the pandemic, the government has demonstrated that it simply won’t let this enormous portion of the population fail. The workforce, and, by extension, workforce housing, is effectively backed by the full faith and credit of the U.S. government.
On March 27th, as stay-at-home orders began to shut down the economy, the Federal government passed the $1.8 trillion-dollar CARES act – the largest stimulus bill in American history. The bill was aimed squarely at relief for small business and middle to lower income Americans, and included a $350 billion Paycheck Protection Act to help small businesses pay employees, rent, and bills; $290 billion in the form of direct payment of $1200 checks to lower and middle income Americans; a 13 week extension to unemployment and an additional $600 per week in Federal unemployment benefits; $25 billion for food stamps. The list goes on.
Far from being destitute, in April, many of the residents of our class B and C apartments suddenly found themselves with more money than they’ve ever had. While some landlords were concerned that the moratorium on evictions would discourage tenants from paying rent even if they were able to, our property managers have stellar relationships with our tenant base, and we collected more rent in Q2 than we did in Q1.
“But Josh,” you might say, “the Federal boost to unemployment ends in a few weeks! And we’re in an election year! What if there’s a change in administration? Will people who can’t work from home still be able to pay rent in December?”
All valid questions. We’re certainly not out of the woods. After the longest bull market in American history, we are officially in a recession. We’re beginning to see retailers that provide jobs for the working-class file for bankruptcy, and more bankruptcies are sure to follow. States that had reopened are beginning to clamp back down in light of spiking case numbers. But in spite of this, we have a Republican administration that has demonstrated – in no uncertain terms – that it is not going to let the workers that make up the backbone of the economy get kicked out of their homes and starve.
And an administration change? Sure, a Biden presidency will almost certainly create a less favorable atmosphere for business than would four more years of Trump. But riddle me this – is a Democrat more or less likely to pass additional stimulus in support of the working class?
While smaller government is a continual talking point of the Republican party, the reality is that the Overton window of political choices is closed to the possibility of allowing the workforce to starve. Whether you’re a bleeding-heart liberal or a red-blooded Republican, letting the workforce fail simply isn’t on the menu of options for a United States politician. Gridlock aside, there is little doubt in anyone’s mind that more relief is coming, and with it, the ability to continue to pay rent in spite of a bleak near-term economic outlook.
The government obviously can’t keep writing checks forever. Resources are finite, and at some point, people have to produce and exchange valuable goods and services. But we’re not talking about forever. We’re talking about until January. Or March. Phase III of promising clinical trials for a vaccine are beginning, at which point we all roll up our sleeves, wait for a slight pinch, and begin to rebuild as the world returns to some form of normalcy. But until then, the workforce is backed by the U.S. Government, and owners of workforce housing can rest easy in that knowledge.