Property Preservation: Rising Standards, Rising Stakes
(left to right: Moderator Joseph Marino IV, Mark Driscoll, Amy Blackman, Justin Thomson)
SAN DIEGO–Property condition reports and inspections are more critical than ever as poor property conditions and deferred maintenance increasingly drive insurance risk and higher coverage costs, panelists said Monday at MBA’S CRE Servicing Solutions Conference.
Joseph Marino, IV, co-founder and CEO of Varro, moderated the breakout session. He asked Mark Driscoll, senior director with Fannie Mae Multifamily, about the most significant pressure points in underwriting and surveillance inspections.
“From our perspective, there’s stress in the market, rising fixed costs, so with those rising fixed costs, borrowers are looking around for ways to save a buck or pinch a penny and invariably that ends up landing on variable expenses, and that’s all stuff that impacts the actual [property] condition,” Driscoll noted.
Driscoll said property owners often look to reduce their repair and maintenance costs among other expenses. “We’re seeing this over and over, and the number of deals in special servicing is increasing as a result. So that’s the overarching theme. There’s market-specific issues, but that’s the overarching behavioral issue that we’re seeing.”
Justin Thomson, senior director of real estate services with Freddie Mac Multifamily, said his firm lends on some workforce housing properties dating to the 1960s, 1970s and 1980s. “These are properties that are already 40, 50, or 60 years old,” he said. “So, from a property condition perspective, the building systems are past their useful life, so that puts a lot of pressure on these properties. If they’re not willing to maintain them, that’s going to lead to higher expenses.”
Thomson added that some renters at those older properties are struggling with the increasing cost of living and other pressures, so some properties are also having issues with occupancy dropping. “Pair those two together and you’re seeing a big reason why you’ve got these issues,” he said.
Amy Blackman, regional managing director with Apprise by Walker & Dunlop, said some markets have experienced declining rent growth for the past few years. “There were a lot of operational efficiencies that owners and operators were going for initially to try to sustain themselves over those periods of rental decline. Since we haven’t seen the top line rent growth number really start to increase, they’re trying to save their bottom line as much as possible,” she said.
Blackman noted indicators she looks at on the valuation side include what’s happening in the market and what’s happening to the asset. “That can really start to tell you the story of where they’re starting to cut corners, or being able to peel back as best as they can,” she said. “If they couple that with increased vacancies, they’re getting hit on a lot of different levels, and it’s natural for them to try to kick down the line to the next year, next year, next year, and we just haven’t seen the market turn around enough to substantiate large capital investments.”
Thomson said from an origination perspective, typically third parties will give an estimate of the value of property, and if those considerations relative to its age and its condition are not properly evaluated, or if the reserves are not in place to address capital needs, things tend to snowball. “So, it’s really important up front to get a good realistic evaluation of property and be realistic about those building systems. Are they in need of repair? How well do they actually get maintained? If not, if it’s more of a reactive practice, you’re going to need to expect there’s going to be more repairs.”
