Even as COVID-19 ravages the health of millions, it is also wracking world economies. Stay-at-home orders are forcing everyone in the multifamily realm—owners, lenders, brokers and tenants alike—to adapt to a fluid and uncertain situation.
In the latest installment in our “Breaking through the disruption” webinar series, Noah Birk of Kiser Group, Aaron Metaj of Northwind Financial and George Relias of Relias Law Group will take a deep dive into the state of the Chicagoland multifamily market. Don’t miss out—register for the free webinar now.
One punch that owners and brokerages have to roll with is the behavior of lenders. Some banks have delayed funding for specific deals, waiting to see what impact the pandemic may have on a building’s cash flow.
“Escrows have been normal, other than financing,” said Noah Birk, partner with Kiser Group. “Predicting what the banks are going to do has been the biggest wild card by far. Several banks have pulled out of deals at the last minute. We’re surprised by these curve balls and scramble to try and find replacement debt quickly.”
The U.S. government has tapped into numerous fiscal measures to try and stave off a recession and, among other goals, provide some relief to building owners. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, for example, offers loan forbearances and other protection to those with multifamily mortgages backed by Freddie Mac and Fannie Mae.
Expanded unemployment benefits and the one-time stimulus payment to qualifying Americans should also alleviate some of the strain that tenants are facing. New Marcus & Millichap data suggests that 69 percent of renters were able to meet their April rent obligations by the 5th of the month. This is a 12 percent year-over-year decrease, but a better outcome than many had feared.
As the Marcus & Millichap report shows, apartment fundamentals were remarkably strong at the start of 2020, building on multiple years of robust performance. Around the country, vacancy among workforce rentals approached a 20-year low at the end of last year. Beginning with a peak in 2009, Class C vacancy dropped 570 basis points into the mid-3 percent range; vacancy among Class B assets fell 330 basis points in that time span, beginning this year in the low-4 percent range.
Since the Great Recession, multifamily housing has performed exceptionally well. For most, leases proved to be a more affordable option than a mortgage on a single-family house and younger generations continued to prefer renting to owning, even as they married and formed larger households.
The pandemic has yet to change those fundamentals. In fact, young professionals who were considering purchasing a home are likely delaying that decision for now. There has been one effect, however, as prospective tenants are reluctant to tour buildings.
“Since the [stay-at-home] order was issued, we’re conducting four to five showings per week, which is down considerably,” said Birk. “Between our team, we typically do that many or more showings per day.”
Some markets are better positioned to weather this storm. Regional logistics hubs in the Midwest, according to the Marcus & Millichap report, may stabilize as e-commerce buoys the job market—particularly in comparison to coastal markets that will be adversely impacted by international supply chain disruptions.
However, rentals in markets at the height of their COVID-19 outbreaks are more at risk from strict shelter-in-place orders. Illinois Governor J.B. Pritzker has suggested that the state’s peak of COVID-19 cases has been pushed from this month out to mid-May. This is an artifact of the “flattening of the curve” tactic—spreading out cases so that hospitals are not overwhelmed also means that the virus can linger in population centers for longer, and thus shelter-in-place orders may be lengthened.
The pandemic is also having different effects on multifamily assets in different tiers. Workforce housing faces a higher risk level as the tenants in those properties are more likely to be affected by job losses and financial hardship. Tenants in Class A properties are more likely to have a savings buffer, as well as a job that can be performed from home.
Regardless of the property’s tier, owners are facing tighter budgets across the board. Reduced rental income is part of the equation but added maintenance costs have to be factored in as well since many landlords are taking extra steps to clean common areas to prevent transmission of the disease. Long term, residents spending more hours in their units for extended periods of time may mean added refurbishment costs.
The pandemic has created a lot of uncertainty in nearly all sectors of the economy, and multifamily real estate is no exception. But no other asset class has the ability to both maintain some level of normalcy throughout this crisis and bounce back the quickest once it is over.
“We are spending a great deal of time staying in touch with our existing relationships, but we’re also actively building new relationships. We’re constantly talking with both existing and new relationships, providing insight on what we’re seeing and hearing—while at the same time learning about those clients’ ‘new’ needs and goals,” said Birk. “Our mission as commercial brokers is not just to meet, but exceed our clients’ business and financial goals—and now is the perfect time to strategize how this can be achieved.”