Following January’s NMHC, there was a lot of optimism about multifamily housing in Philadelphia in 2020 given the abundant capital and the sector’s track record as a relatively stable environment for generating returns. Pre-pandemic, Philadelphia had a steady flow of investors into the market and healthy transaction velocity.
At the onset of COVID-19, there was an abrupt pause. With nothing to compare this event to and no guidelines or expectations about how the economy would react, debt markets suddenly became unavailable. With potentially unpredictable cash flows, sales activity came to a standstill. We found ourselves pivoting our energy into being an advisor and resource for our clients to help them mitigate risk and position themselves appropriately to take advantage of market shifts.
Early signs of an uptick
Luckily, the true impact to multifamily has been less significant than initially projected. Collections for quality operators have remained relatively steady through April and May—compared to last spring, we’ve only seen around a two to five percent drop in collections while occupancy has remained strong. Class A and B+ properties have done well so far, owing to a tenant base that has been able to transition to remote work and maintain employment. As we move to Class C properties, unemployment has had a greater impact, so those asset types are experiencing slightly greater negative effects of COVID-19.
The biggest impact on multifamily housing in Philadelphia has been those with a significant retail component, traditionally found in more urban areas. Uncertainty around the health of retailers, if they return after being closed, has presented unique challenges to those asset types. Overall, for well-located, quality, professional managed multifamily assets, the challenges of COVID-19 have largely been more anticipated than actual. Now, almost three months into the pandemic, we’re starting to see the debt markets loosen up and a return to market activity.
Where investors are headed
With the resilience demonstrated by the multifamily sector and the economy starting to open back up, pent up capital is eager to start moving. Investors have the bandwidth to start looking at properties of all asset classes, office and retail included, and sellers are slowly starting to put properties back on the market.
We expect that there will be a continued flight towards quality, with well-located suburban assets gaining traction, particularly in light of COVID-19. What we consider the return to Main Street, which has been driven by transit-oriented properties, will continue with more of an emphasis on walkable amenities and entertainment. West Chester, a borough outside of Philadelphia, is a good example of an area that has demonstrated strong investor interest in recent years for its robust downtown, proximity to attractions and quality asset offerings. There’s a strong investor demand in stable, quality assets that will continue to do well and generate rent growth.
Of course, we cannot ignore the current political unrest, which is challenging our country and has cast new unknowns on commercial real estate. However, we believe now more than ever in the resilience of our sector, especially multifamily.
Changing for the better
As we navigate the obstacles and challenges of COVID-19, we’re also optimistic about some of the long-term improvements that this will have on our industry. Overall, we’re seeing an increase in efficiency, largely as a result of clients and advisors embracing virtual conference technology. As someone with experience in the tech industry, I find this transition really exciting for commercial real estate. We’re finally catching up to how more progressive industries have used technology and content to communicate more efficiently. Not to mention, gaining more time back in our days has granted us more quality time at home with our families, which has been invaluable.
With travel largely on a hiatus, we’ve developed more content driven marketing, including virtual tours, to drive investor interest in properties. So far, we’ve found it to be not only more efficient, but also cost effective for all involved. As travel does return, we expect it will only be those clients who are genuinely interested in a property, cutting down on the number of walk-throughs required and making the sales process smoother and less burdensome for owners and managers on the ground-level. We’re excited for this to continue, particularly since a large majority of investors in the Philadelphia market come from out of state.
As we all know, 2020 so far has been surprising to say the least; however, we are confident that the Philadelphia region remains strong, that the multifamily sector has a positive outlook, and that we’ll all weather the storm together, coming out of it better than before.
–Zac Pierce, Senior Managing Director