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Is Multifamily Right to Invest in During COVID?

State of Multifamily Real Estate for Investors during COVID

COVID-19 caused global chaos in the business and investment sectors in 2020. So much so, the multifamily real estate investment sector, known for its resilience, could not escape the wrath of the pandemic as well.

According to Forbes, multifamily real estate remains strong amidst economic uncertainty due to the COVID-19.

Let us look back at the pre-COVID-19 era; the U.S. multifamily markets enjoyed a decade of investment flows and improvement since the big recession in 2007.

The multifamily real estate sector is popular to withstand the market downturn compared to other properties. They continue to do so during coronavirus lock, but not as flawlessly as they used to.

Many multifamily property renters are facing mass furloughs and layoffs. Moreover, as their income decline or disappear, you will see the impact on rental revenue, overall valuation, and operating metrics.

Thus, the multifamily real estate investment sector has been and will continue to experience massive changes while the nation’s economy struggle during the coronavirus pandemic.

Despite the uncertain market conditions, multifamily real estate investing remains a promising front for investors from all walks of life.

Tangibility

No investment sector is 100 percent recession-proof. Hence, it all boils down to which type of real estate investment sector you invested in and your property’s geographical location. The markets affected the most by the recession will dictate how recession-proof your investment actually is.

This is why it is imperative to shift your focus on the merits of investing in the multifamily real estate properties. Here are the three strong reasons making it easier for you to decide.

 

  1. Multifamily real estate investments are likely to produce a stable income stream.
  2. The multifamily real estate sector is volatile compared to other assets classes.
  3. Multifamily properties are more likely to outperform other investment sectors, such as stocks and bonds.

 

By owning a multifamily real estate, you become the owner of a property that is not mismanaged or overly leveraged. Moreover, it has minimal risks of “lost to the bank” or being ceased.

On a more personal note, it will always help you have a well-balanced yet diverse investment portfolio with low leverage ratios and minimal debts. This refers to the balance between the debt and equity investment carries.

If you wish to have better odds of defeating the recession, having fewer debts is the way to go about it. This is even more convenient when you have a handsome reserves ratio to help cover unforeseen sharp declines and unexpected expenses in your investment’s return.

Thus, during the hard economic times of the COVID-19 pandemic, it the tangibility factor of the multifamily real estate sector that makes it a safe haven for you as an investor.

That said, let us look at the current situations in various domains of multifamily real estate investment.

Impact on Multifamily Real Multifamily Real Estate Construction

Before the COVID-19 pandemic lockdown, the volumes for U.S. multifamily permits were at their peak since 2015.

January 2020 saw the construction starts reaching a 34-year high. However, according to RealPage reports, the multifamily sector was already experiencing a decline in both starts and permits.

According to the U.S. Census Bureau data, in January 2020, 522,000 multifamily units had approval for construction, and work was already underway for another 547,000 units.

By February, the numbers of permits declined to 415,000 units, which was s 20% decline compared to January 2020, and 5% compared to the figures in February 2019.

Chuck Ehmann, an author and real estate economist at RealPage, said permits might continue to show a gradual decline in the months to come due to the COVID-19’s effects. It might also be due to developers trying to wait before starting a construction due to strict SOPs from the government and, most importantly, due to economic uncertainty.

However, experts predict that the COVID-19 will unlikely ruin the multifamily real estate construction in 2020. As soon as the government lifts the stay-at-home order’s ban, the multifamily real estate will pick up.

COVID-19 and its Impact on Average Multifamily Rents

Apart from slowing the pace of permits and constructions, average rents of multifamily real estate have experienced a decline as well.

The main reason is the U.S. economy coming to a grinding halt as millions of citizens have lost their livelihood, furloughed or advised to stay at home to evade the effects of the pandemic.

However, recent reports have shown some promising figures, and according to the U.S. Census Bureau’s report, renters in certain areas are outperforming other tracked metros.

For instance, in Omaha, the share of renters catching on their previous months’ rent payment reached 93.3%, which is well above the national average figure of 79.2%.

cost segregation rental property

Similarly, according to the chart above, the renters in Birmingham ranked the lowest in meeting their rental obligations at 63.2% in July 2020.

According to Jonathan Kern, Chief Investment Officer and President at Civitas, the multifamily real estate sector is the fastest to recover from a recession or financial turmoil.

He further added that the multifamily real estate sector suffered less compared to other sectors. Additionally, it rebounded even more strongly than other property classes during the last two recessions.

Kern says, in the past, the multifamily rentals fell the least and recovered the most. More promisingly, not only did they fully recover but also reached the new highs within the next three to four years after each recession.

Hence, if you are an investor considering the multifamily real estate sector, the time is nigh. This is the best time as the rents are already showing signs of improvement in the residential multifamily sector.

Impact on Large Multifamily Real Estate Investment Sector

The multifamily investment sector varies across the U.S. market. There are various accountability factors, such as labor composition, urban density, economic demographics, and geography. However, 2020 brought in another component to the mix, i.e., the COVID-19 pandemic.

That said – the overall investment activity in the multifamily real estate sector held up amidst this travesty. The lending volumes, including loan originating for both refinancing and investment sales, have been steady.

Multifamily real estate investments lead the way and account for 7.8 percent of overall lending volume in Dallas, Texas. Moreover, rental collections have held up promising well than expected in the area.

The good news is, the multifamily investment market is already showing signs of improvement. The investors are transitioning out of the “wait and watch” phase. Plus, the deal closings are on the rise again.

cost segregation rental property
cost segregation rental property

Following the trend, Phoenix and Houston are right behind in the second and third place. Even during the economic disaster due to the COVID-19, Houston remained resilient and demonstrated above-average success than other areas critically dependent on logistics, industrial, and healthcare sectors.

Current Multifamily Real Estate Market Today

In order to paint a clearer picture of the COVID-19’s impact on the multifamily investment sector, Houston Business Journal hosted an event named “State of Commercial Real Estate: Multifamily” on August 13, 2020.

There were 527 business leaders in attendance to outline the post-coronavirus multifamily real estate sector’s challenges and opportunities.

One of the panelists at this conference, Swapnil Agarwal, the founder and managing principal at Nitya Capital, expressed his optimism. He emphasized how well the multifamily real estate has performed compared to other sectors such as retail and hospitality.

He said the rent collection levels currently range between 95 and 99 percent for the 20,000 properties owned by Nitya across the country. Although experiencing a financial crisis, people still need a place to live, and we are doing our best to give relief to those who have lost their jobs.

Moreover, there have been regular rental assistance programs from governments around the country. This will also help the renters pay their rent on time, hence ensuring that the investors get their returns on investment timely.

The senior vice president at Trammell Crow Co. /High Street Residential, Yewande Fapohunda, was also at the Houston Business Journal meeting. He believed that things will return to normal over time, meaning the multifamily real estate investment sector is comfortable with the way things are going right now.

Some cities like Houston in the chart above are outperforming others. Economists believe that in the short-term, the stimulus policies are helping the industry so far. Nationally, multifamily vacancies are down by 60 basis points, and the rents did not even fell even more than half a percent.

However, the multifamily real estate investors must find the right balance, whether soft or oversupply.

Fapohunda further added that Houston, Texas, has a diverse economy, including industrial, logistics, and health care and a good number of populations – which matters. Therefore, we have many reasons to stay hopeful when it comes to multifamily real estate for investors.

Silver Lining for Multifamily Real Estate Investors

Despite the many obstacles right now, certain positive indicators support the resilient behavior of the multifamily real estate sector during the COVID-19 pandemic. Despite what the future may bring, real estate experts, stay optimistic on the outlook for multifamily real estate investing.

If you are an investor, here are seven reasons why it is the best time for you to invest in multifamily real estate.

 

  1. Multifamily properties are long term investment opportunities. Therefore, you may temporarily feel the slowdown effects in the real estate sector, but things will pick up soon.
  2. Promising, to respond to the COVID-19 pandemic, interest rates by the U.S Federal Reserve and banks are at their all-time low. These lower interest rates will create perfect opportunities to maximize your return on investment.
  3. Tenants vacating the properties will decrease drastically. This will reduce the capital and operating costs associated with finding, screening and securing new tenants.
  4. As work from home or remote locations will remain effective in times to come, residential apartments’ demand will continue to increase (especially amongst the young professionals).
  5. People will always need a residence to stay in regardless of how bad the economic crisis gets. Those facing eviction or losing home ownerships of their class-A rentals will look search to move into a more affordable class-B or class-C rental homes.
  6. Vacancy rates will continue to remain low due to the decline in the multifamily units’ construction sector. This means you will have a full occupancy at your multifamily real estate with continuous income with low operating costs.
  7. In such a volatile market, multifamily real estate investments stay a stable income source, especially for investors using their pension funds for the purpose.

 

All of the benefits mentioned above indicate that now is the right time for the multifamily real estate investors to purchase the multifamily properties.

Contributing Factors during the COVID-19

Now you have a clearer picture of the current situation of the multifamily real estate for investment. Let us look at some of the contributing factors that may play a vital role in defining the promising aspects for you as an investor.

Effects on Rental

The effects on the rentals pertaining to different geographical locations and classes will vary. Of course, the class-A multifamily units tend to house people working in growth-oriented industries. Therefore, they are more likely to bring in maximum rents.

On the other hand, class-B and class-C multifamily units house tenants from all walks of life working in several economic sectors. This is truer for the class-C multifamily real estate properties, as most renters of these properties belong to the food and entertainment sectors.

Moreover, depending on travel and leisure situations, tourist-reliant regions and states will be the ones to feel the most impact. These include California, Hawaii, south and central Florida, New York and New Orleans.

The COVID-19 “Aid, Relief and Economic Security Act” offers an expansion of benefits associated with unemployment to include workers who do not normally qualify. Moreover, grant programs and loans for small businesses are available at lenient terms to allow businesses to run their payrolls smoothly during these times.

Additionally, the subsequent Health Care Enhancement Act and the Paycheck Protection Program aim to facilitate tenants struggling to cover their monthly rents for April, May, or June 2020.

Effects on Lenders

Lately, banks and lending institutions have been increasingly busy answering a huge volume of calls from customers concerned about their debt obligations due to the pandemic crisis.

For helping the lenders during the crisis, there are programs such as Freddie Mac’s multifamily real estate COVID-19 business program. This program offers three months forbearance for the tenants and borrowers of multifamily properties. This will prevent tenants from falling behind in their rental payments.

The Government

The U.S government might also push for additional legislation and executive actions to allow other local jurisdictions to implement laws prohibiting both foreclosures and evictions.

Although these programs might have an adverse impact on the operating activities right now, most pundits believe this to become a net positive in the long run for the multifamily real estate investors.

COVID-19 and Technology for Real Estate

Coronavirus pandemic is most likely to accelerate the deployment of technological solutions in the real estate sector.

This will help limit one-on-one interactions, but bring in innovative solutions such as smart lockboxes, self-touring technology, immersive virtual touring for the apartments, online leasing, drone footage, and automatic rental collection systems.

Not only will it save time and energy of investors, owners and tenants, but these technologies will also prove to be cost-effective solutions.

For example, automatic keyless entry, water and moisture sensor for HVAC systems help minimize the utility bills, automated self-leasing, and remote thermostats and lighting.

In short, these are some of the technologies that will innovate the traditional multifamily real estate business experience for owners and renters.

It is High Time for the Multifamily Real Estate Investors

With the lockdown orders in place, for now, most industry experts still believe that it is a very much ideal situation for multifamily real estate investors and owners in 2020.

It is unknown what toll this pandemic will take in the long-run on the multifamily real estate sector in terms of property values, market fundamentals, investment opportunities, cap rates, and pricing. However, the overall signs show that the multifamily sector will continue to depict resilience.

Of course, there will be two critical factors that will play a vital role in defining how things are going to pan out. These are as follows:

 

  1. How long is the COVID-19 pandemic going to last?

And,

  1. How quickly will the overall U.S. real estate market recover in the post-coronavirus world?

 

So, keep yourself updated on the latest trends and developments in the multifamily real estate market. It would also be wise not to shy away from seeking an expert’s advice before making a decision.

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