The Latest Changes in the Real Estate Market

The second quarter suffered a huge blow in terms of multifamily assets being traded, which is not surprising as that’s when the coronavirus hit the country and the economy shut down. According to CoStar, transaction volume remains depressed from prior year levels, coming in during the first seven months of 2020 38% lower than the same period in 2019 . The good news, however, was that activity picked up considerably at the start of the third quarter and is predicted to continue on an upward trend.

While deal flow may show a higher volume, there is little to no discount on multifamily pricing from sellers. Many investors anticipated significant price concessions due to the pandemic, but they simply didn’t happen, mainly because rent collection has been strong in many properties. I’ve found that many sellers are now taking a wait and see approach, and investors and sponsors are looking at more stringent lending requirements, which makes borrowing money more challenging.

Multifamily properties are considered resilient and have shown consistent price gains over the past several years. Despite that resiliency, many investors are questioning the impact of the COVID-19 pandemic on the ability of multifamily properties to withstand the economic fallout of the pandemic. While nobody can predict the pandemic’s future impact, the good news is that there are many basic market fundamentals that show the future of multifamily real estate is bright.

Long Term Trends for Multifamily Properties

There’s no question the real estate market can be volatile, but multifamily is one sector that remains a solid investment. This is born out by continued investments in multifamily properties by pension funds and REITs, along with passive investors. One of the factors bolstering the optimism is that interest rates continue to remain at historically low levels and are predicted to remain there in the future.

Another factor fueling an optimistic outlook for multifamily properties is that tenant turnover is expected to decrease dramatically, basically because many tenants avoid moving out during COVID. This will help property owners as it will reduce their operating expenses and capital costs related to fixing units for the new tenant, and finding and leasing to new tenants. Experts also see an increase in the demand for apartments, particularly by younger renters, as the “work from home” phenomenon is expected to continue well after the pandemic ends. Finally, as construction of new units declines, the vacancy rates should remain low.

Evictions Are on the Increase

Evictions have recently been picking up in intensity. In the first round of the CARES government’s stimulus package, there was a moratorium on evictions in an attempt to help the unemployed weather the pandemic’s storm. In fact, there are still many municipalities and states that are continuing to ban evictions if the tenant’s inability to pay their rent in full is due to the coronavirus pandemic. However, evictions have not increased to a high level to trigger any alarm bells within the multifamily sector, even with the new eviction moratorium.

Rent Collections Holding Steady

While there was some decline in collections, it wasn’t as large as predicted. According to the National Multifamily Housing Council (NHMC), 76.4% of apartment households made either a full or partial rent payment by September 6th. This statistic applies to a survey of 11.4 million units of professionally managed apartment units across the country. It’s interesting to note that while data isn’t yet available for the entire month of September, in August almost 95% of renters paid their full month’s rent by the end of that month. It’s anticipated that when September numbers are collected, they will show a similar percentage to August.

While a stimulus package is still a possibility, which would greatly help those who are unemployed meet their expenses, it is currently at a standstill. The House and the administration are at an impasse as to what the stimulus package should contain, along with the amount of federal help that the government would provide in addition to state unemployment payments. Many involved in the negotiations wanted the package to include assistance to states to meet the unprecedented demand for financial aid, while others didn’t want that to become a part of the package. 

Occupancy Rates Are Higher

Remarkably, despite the coronavirus pandemic and record unemployment, apartment occupancy rates are expected to remain stable or increase in all of the major metro areas. Freddie Mac stated that due to the prior number of years of above-average income growth and property price appreciation, well-positioned properties won’t be impacted.

While there has been an increase in bad debt, Freddie Mac also stated that the projected minimal gross income decline and rent collection won’t have a major impact on the ability of well-run properties to pay their monthly debt and expenses. This will help keep the market on solid footing without the fear of owners seeking forbearance or other types of protections.

The Pandemic and Multifamily Investments

Sadly, but understandably, many home foreclosures are predicted to occur. On the positive side for multifamily properties, this could mean many new renters will be entering the market. The key will be when the economy opens up again, and how robust the re-opening is. A lot will depend on the unemployment numbers and when some of the closed businesses are able to rehire their employees.

The volume of multifamily deals has fallen below $5B in April, which hasn’t happened since 2010. That isn’t surprising, considering the amount of uncertainty in the market. While the number of available properties is quite low, the fact that deals are happening at all is surprising as nobody can predict potential demand for rentals due to the high unemployment numbers.

The other issue is the tighter lending restrictions, which could force investors not to over-leverage. Lenders are working to make sure that investors have a sufficient amount of capital to manage the property properly, and not have a cash-poor asset. There has to be enough funds available in reserve to cover repairs or emergency expenses, especially if tenants end up not paying rent because of unemployment.

Going Back to Basics

Once the economy stabilizes and the uncertainty in the multifamily market settles down, there will be many investment opportunities available. Experts are cautioning investors to go back to basics when looking at properties. This includes examining the property’s location, the area’s unemployment situation, and what the property’s occupancy rate has been during bad economic times. Is the property in a strong market? Will there be job growth in the market when the economy rebounds? Answers to these and other basic questions will enable a smart investor to make the right decisions despite uncertainty about the future. 

Summary

Despite a depressed economy and uncertainty about when the country will rebound, there is still optimism about the multifamily market. This optimism is fueled by some basic market fundamentals, including predictions that tenant turnover will continue to decrease dramatically, reducing operating and capital costs for property owners. In addition, interest rates are at the lowest levels they’ve been, and are expected to remain there for a long period of time. This is a boon to investors, despite tighter lending restrictions.

While evictions are on the upswing, there are still moratoriums on evictions in place at the local and state level. Nobody is sure when they will ultimately expire, but currently occupancy rates are either stable or have increased in all the major markets, which is a good sign. Also, while there is an increase in home foreclosures, that is putting more renters in the multifamily market.

Finally, deals are still being made. While there aren’t the price concessions investors and buyers expected, properties are being purchased. Buyers are going back to basics, taking a closer look at the property’s location, the area’s unemployment situation, and a review of the property’s occupancy rate to see how it performed during a poor economy.

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