Yes, now is the time. We were already moving into a recession at the beginning of 2020. Multifamily has historically been a very good investment during a recession. Now, with the pandemic creating volatility in office, retail, industrial and other sectors, the capital usually directed toward those investments will most likely seek the stability and predictability of multifamily. But it has not happened yet. Everyone’s too shell-shocked. This creates a perfect window to buy.
Why is multifamily the strongest asset class during the pandemic? It’s pretty simple: Everyone needs a place to live. In Maslow’s Hierarchy of Needs pyramid, the base level is physiological needs. These are described as air, water, food, shelter, sleep, clothing and reproduction. Housing is a foundational, basic human need and will always be. Although rents can go up and down, or, in some markets, be capped or controlled by legislation, the reality is that there will always be a demand for the product. Several product types exist in commercial real estate other than apartments, and those product types see more volatility in demand. We were already seeing that play out in the retail industry, and now, with the pandemic, we are seeing the (hopefully temporary) effect on office real estate.
The strength of multifamily during a downturn or crisis was most evident in a recent survey my company conducted on May 9, 2020. We are brokers specializing in Chicago midmarket multifamily. We sent a survey to our clients about rent collections and bifurcated residential and commercial because so many buildings in the city of Chicago have ground-floor commercial space. We received rent collections results for March, April and May 2020 that clearly demonstrate the resiliency of multifamily and the volatility of retail/office.
Apartment rent collection exceeding 80% was reported by more than 94% of respondents for March and April, and May rent collections above the 80% threshold are actually slightly higher, at 95%. The National Multifamily Housing Council had similar findings: 93.3% of apartment households paid rent as of May 27 in its survey of 11.4 million units of professionally managed apartment units across the country, and 89.2% of tenants paid rent in April.
On the commercial side, the results were much different. Over three-quarters of our respondents experienced commercial rent collections above 75% in March, but it plummeted to 47% in April and 44% in May.
The other factor that makes now the time to invest in multifamily is interest rates. Although lenders’ reaction to the pandemic has created tougher standards for loan-to-value ratios and reserves, interest rates remain at an all-time low. Recently, a client told me that he had secured a four-property refinance loan, leveraged to the maximum level possible, and had pulled out enough capital to buy an additional property, yet his overall debt service payment was lower than before the refinance because his rate was 3%.
To summarize, apartments remain strong during recessions. Apartments are demonstrating relative resilience amid the COVID-19 pandemic. Capital will gravitate toward apartments from other commercial asset classes, but it hasn’t started en masse yet. Interest rates for apartment property acquisitions are at record lows. All of these factors culminate in now being the perfect time to invest in multifamily.