The COVID-19 pandemic is changing not only our daily lives and routines but also how capital gets invested and deals get done in the multifamily industry. It’s natural to think the worst during this crisis and be cautious. This mentality will be the reason that the rate of new multifamily deals slows down in the immediate term.
But that same cautiousness must be met with careful optimism based on detailed analysis and hard data. We as commercial real estate professionals must recognize an opportunity to support our industry and our clients by providing a level-headed assessment of the new reality we face together.
While billions of dollars in investment capital remain on the sidelines, there’s no question that investors will be scrutinizing their options more closely than ever. We hope this analysis outlines clearly for our clients and partners what we expect to be the most likely short-term impacts of COVID-19 on capital flowing into the multifamily industry.
Immediate Impacts of Capital Flow into Multifamily Transactions
Thanks to strong fundamentals and inelastic demand, apartment housing remains a uniquely attractive target for investors. That said, the COVID-19 crisis will likely produce ripples through the industry that affect how investors view the short- and long-term performance and overall value of multifamily assets. Here are four ways we expect those expectations to be adjusted:
- With an economic downturn all but certain, class A product may be vulnerable to short-term adjustments in demand. Operators of newly constructed properties will be the most likely to feel pressure to offer deep rent discounts to lease up new supply coming online through the rest of 2020.
- Class B properties will likely be among the best-positioned opportunities for multifamily investors, and related deals should see a subsequent influx of capital. The large spread between rents at Class A vs. Class B properties now presents a twofold opportunity for investors: both traditional long-term upside and short-term opportunities for attracting renters looking to cut costs as a result of recession pressures.
- Class C assets are the most susceptible to a major disruption. A large proportion of workforce housing consists of tenants that live paycheck to paycheck. A recent national moratorium on evictions may provide relief to these individuals, but the reality is that those low-income renters are also the most at risk of losing their jobs during this period.
- Finally, markets with employment hubs weighted towards trade and hospitality industries will likely give prudent investors pause before moving forward on deploying new capital. Areas most likely to feel the most economic pain from COVID-19 and incur dips in capital flow for multifamily projects include Las Vegas, Orlando, and Orange County.
Multifamily Remains Optimal Long-Term Investment Vehicle
Despite the mounting number of hiccups expected to affect the apartment market, overall demographics will continue to highly favor multifamily investors. There will continue to be strong demand over the next decade as renters in their 20s and 30s begin to make up an increasingly larger percentage of the population.
Initial lease renewal rates exceeded 53% in 2019. According to RealPage, renewal rent growth has consistently registered around 4.5% annually for the past few years. Operators can also expect renters to stay put in the meantime as the COVID-19 crisis continues to unfold.
No doubt, we will see a brief interruption of capital flow in the immediate term. But looking at the bigger picture, the recent changes in federal interest rates point to a massive volume of capital on the sideline that will soon be searching for yield.
Multifamily, by contrast, remains a relatively stable investment in the long term. And when we look at yield returns from an international perspective; the United States is still the safest and best market for capital appreciation.
Berkadia understands that deal makers are adjusting to the new norm of doing business in the social distancing environment, and we are doing our best to make those transitions as easy as possible. Please continue to visit our blog for weekly updates on the wide-ranging impacts of COVID-19 on our industry.
– Jonathan Rappa