2021 Apartment Outlook
The health of a multifamily investment is determined by occupancy and collections. Both are impacted by the pandemic, and therefore, multifamily investment is feeling effects. In forecasting the health of the multifamily market for 2021, the question is how these two factors will change. As a long-time real estate broker and principal of a multifamily brokerage, I see the impacts each day and developed an answer to this question. I believe the answer is in three main areas: the pandemic, the oval office and financing. None of these three areas are mutually exclusive but are all deeply intertwined.
Occupancy fell most dramatically in urban areas because many of the reasons people want to live downtown — restaurants, bars, nightclubs, theater, sports — have all been reduced or shut down due to the virus. As leases expire, some tenants are moving because rent is cheaper outside urban areas, and the incentives for paying higher rent listed above are not available — for now. Collections are also affected by the virus because of pandemic-induced job loss and tenants simply being unable to pay. The eviction moratoriums in many places create an additional impact on collections. Recent pandemic news is dominated by a major surge in infections and the promise of coming vaccines. We will start in 2021 with the same issues we have now. As each step of the vaccine progresses, these problems will become less and less prevalent. My prediction is that by the fall of 2021, the vaccine will reach much of the U.S. population, and the urban lifestyle will return — with increases in occupancy to follow. As the businesses that create this urban lifestyle revive, so do the jobs that go along with it. At this point, we should also see an increase in collections. I also predict that the urban areas most deeply affected will also rebound very quickly, and we will see a demand for a return to normal that will exceed supply, likely leading to rent increases.
The possibility for mitigating the issues of occupancy and collection prior to the solution lies partly in the form of an additional stimulus from the government, which is why the oval office is deeply intertwined with the multifamily forecast.
The Oval Office
Regardless of who you wanted in the White House and whether you think the results are positive or negative, simply knowing the conclusion of the presidential campaign and election brings a level of stability, expectation and direction not only for the American population but also for Congress. The issue of collections relative to job loss mentioned above has been exacerbated in part by the lack of additional stimulus investment by the government — which has been held up in part because of politics and the election. The previous stimulus helped carry many people through the summer, but occupancy — and collections — have fallen slightly between May and October due in part to the lack of additional stimulus. I anticipate that now that the election is over, there will be bipartisan agreement on a new stimulus package. I also anticipate that a new national plan for the pandemic will be proposed, one that could be more cohesive for managing the pandemic until vaccines can be distributed. Whether you agree or disagree with a central plan and direction is not the point. The point is there will be a unified direction, which reduces uncertainty, volatility and speculation. When uncertainty is reduced, markets are less volatile.
With the conclusion of the election, I also anticipate a reduction or elimination entirely of civil unrest. This is important because the effects of these activities may well have exacerbated occupancy issues, with tenants potentially including it as one of several reasons to leave areas where these activities occur.
My prediction is that early in 2021, we will have an additional stimulus and we will see collections increase. I anticipate that a cohesive federal plan for the pandemic will be introduced almost simultaneously, resulting in investor confidence that normalcy of lifestyle will return in the third quarter of 2021.
Commercial real estate lending markets are sensitive to perceived instability. Occupancy, collections, lack of stimulus, lack of a plan for pandemic and civil unrest all create volatility, which forces lenders to mitigate their risks with more conservative underwriting, debt coverage and loan to value. Many banks are changing their underwriting standards to be more conservative. From an anecdotal standpoint, I’ve heard that some banks are not honoring appraised values but instead changing the loan sizing based on fear of occupancy and collections falling further. The changes described in earlier sections in this article all lead toward more stability, which should lead to predictable and stable standards for underwriting, debt coverage and other items found more consistently in loans made prior to the pandemic.
The economy was already in recession, which was exacerbated by the pandemic. Interest rates have been at historic lows as an offset to a recession. Economic recovery and inflation brought about by the solutions described above will most likely be accompanied by an interest rate increase.
My prediction is that lending will normalize during the second quarter of 2021, and that interest rates will be approximately 100 basis points higher at the end of 2021 than they are now at the end of 2020.
Multifamily is still the golden child of commercial real estate investment asset classes, but it has definitely taken a hit in 2020. If my predictions about the pandemic, Oval Office and finance are accurate, expect the post-pandemic health of multifamily to exceed what it was prior to the pandemic.