Director’s Notes: Three Numbers Signal the Future of Multifamily Real Estate

September 23, 2020

Director’s Notes: Three Numbers Signal the Future of Multifamily Real Estate

September 23, 2020

With Berkadia’s research department still working remotely, an empty Scottsdale office is a daily reminder of everything we have had to get used to while working during a nationwide pandemic. Thankfully, our view of the future of real estate is a bit brighter due to several encouraging trends that began playing out during the third quarter:

  • Multifamily deals made up the largest share (40%) of commercial real estate transactions taking place during August, reflecting the industry’s resilience during times of trouble thanks to non-elastic demand for housing
  • Investment sales activity has seen a decline due to the coronavirus, but that decline was not specific to one geography. Currently, there is little data to support the narrative that we will see a trend of investors fleeing primary and coastal markets.

Furthermore, I encourage anyone following the multifamily industry or curious about the future of real estate to keep their eye on monthly sales volume, rent payments, and consumer confidence. These numbers will tell an important story as we approach the presidential election at breakneck speed.

Three Numbers Signal Future of Real Estate

Multifamily Sales Volume

Like much of the real estate industry, the multifamily sector experienced a major decline in sales volume as a result of the economic recession caused by the COVID-19 pandemic. Thankfully, that trend began to reverse course during the third quarter. Over $5.5 billion in multifamily transactions occurred during the month of August, the highest monthly sales volume recorded since April of this year.

Multiple factors have contributed to the turnaround. Chief among them low interest rates enticing buyers to meet sellers on price.  We’ve primarily seen small and medium size local players completing deals in recent months, most likely due to the fact they can conduct due diligence and property inspections more easily than national players.

Additionally, resilient job growth in key industries has also contributed to an uptick in interest to do deals, despite nationwide economic fallout caused by the virus. In some cases, like much of the corporate and tech world, jobs were less vulnerable due to the prevalence of remote working capabilities. In others, such as Amazon’s recent hiring surges, the unpredictable “new normal” has been a boon for job growth.

Expect to see incremental growth in monthly sales volume through the rest of the year buoyed by increased demand for Class B apartments due to renters tightening their budgets.

Rent Payments Made

The number of renters struggling to pay their rent on time has begun to plateau., according to the latest data from the National Multifamily Housing Council (NMHC). Through the first three weeks of September, 90.1% of renters have made full or partial rent payments, up 10 basis points from 90.0% of renters who paid by August 20.

NMHC President Doug Bibby pointed to pandemic-related financial distress and expiring government assistance as the primary drivers of the overall trend. With pandemic relief taking a back seat to the push to fill the recently vacated Supreme Court seat left by the late Ruth Bader Ginsburg, few expect meaningful legislation to hit the floor until after the conclusion of the November election.

If Democrats take control of the White House or the Senate, the industry can expect renters to be under less pressure to pay their rent on time due to a surge of financial aid. Based on the recent maneuvers of the current administration, expect Republicans to pass case-by-case financial aid packages designed to satisfy the most budget-conscious members of the party.

Consumer Confidence Score

Ultimately, the future of real estate, multifamily included, will be decided by how quickly consumers feel comfortable returning to their prepandemic routines and spending habits. This transition will rejuvenate the economy and help to recover the investor momentum that ground to a halt as the country was overtaken by an unprecedented health care emergency.

The Surveys of Consumers, a leading study of consumer confidence performed by the University of Michigan, revealed a reversal of fortunes that began during the third quarter. In September, the Index of Consumer Sentiment reached a score of 78.9, up 6.5% from the previous month.

Richard Curtin, chief economist overseeing the Surveys of Consumers, noted that the recent uptick in consumer confidence will now be defined by two things: the outcome of the election and the availability of a coronavirus vaccine. He also emphasized that renewed distribution of federal financial aid will be a key component of successful economic recovery.

– Jonathan Rappa, Senior Director of Research