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State of Multifamily Real Estate for Investors During COVID

State of Multifamily Real Estate for Investors During COVID

This year has been unique, to say the least, and the multifamily sector is no exception. Developers are facing new challenges as more families are working from home and others are dealing with job loss and unemployment. In total, however, the multifamily market has remained strong and is even seeing new opportunities for growth in the wake of more severe damage to similar property markets, such as retail and hospitality. This advantage presents opportunities for individuals who are still in a position to invest in the third and fourth quarters of 2020 while private investment is still leading the charge in the multifamily market.

Strong Performance

At a conference on the State of Commercial Real Estate hosted by the Houston Business Journal on August 13th, the Founder and Managing Principal of Nitya Capital, Swapnil Agarwal, said of the current climate, “We’re still seeing this as an opportunity for people who are aggressive.” Nitya Capital owns over 20,000 properties across the United States that are currently maintaining 95% to 99% rent collections.

Agarwal credits their performance to being proactive in office accessibility and virtual tours for new leasing, distributing information to tenants about job availability and Houston’s rental assistance program, renewing existing leases for tenants who weren’t or aren’t prepared to move, and limiting capital expenses. Nitya also launched a $4 million rental assistance program and continues to receive “regular assistance” from the City of Houston, Harris County, and the federal government.

Across the United States, vacancies are down only about 60 basis points with rents falling less than 1%, according to Yewande Fapohunda, Senior Vice President of High Street Residential Trammel Crow Company at the August conference. “Stimulus policies are working,” says Fapohunda. “We are spending more time on individual deals to ensure they’re highly compelling. The locations have to be stellar. It has to be able to show continued rent growth.”

Fapohunda also pointed out the importance of evaluating deals based on the advantages of the land, meaning it aligns with the landowners to help cultivate value. According to a 2020 commercial real estate outlook, multifamily will continue to perform well and demand will be adequate to absorb new supply and lower concessions in oversupplied markets.

cost segregation residential real estate

Asset Opportunities

The multifamily industry hasn’t taken as much damage as other markets have seen, so no rise in distressed assets is expected. Distressed assets are those that have seen a significant drop in value due to loan default or other causes that are specific to the issuer and not the general market conditions. The opportunities that are available and continuing to become available are in hospitality and hotel properties, as well as retail properties.

Construction Costs

When asked how construction costs have been affected by COVID-19, Michael Vaughn, Senior Vice President of Multifamily Properties in Hospitality and Community at Arch-Con Corporation said, “We haven’t really seen any costs through COVID-19 affected, other than things we had to do with regard to safety. We’ve pretty much been able to maintain our schedules.” He went on to add that investors and developers have a unique opportunity in this quarter to find “diamonds in the rough”, referring to quality locations with the right elements to offer high value.

The Effects of National Unemployment

Unemployment reached 14.7% in April 2020, triggering a significant decline in the entire real estate market in the second quarter. Small multifamily assets (under 50 units) saw an increase in delinquencies, defaults, and requests for forbearance in Q2, but that was the only sector of multifamily to show a notable increase. Effective rental rates fell an average of 1% with slightly more deterioration in the third quarter, yet to be analyzed. From here, a steady recovery is expected throughout 2021 with full recovery achievable by 2022. For private investors, the time to get in would be in the fourth quarter of 2020, before institutional investing makes a comeback.

Lending

While investors and developers are taking notice of opportunities in the market, lending has become slightly more difficult to obtain under the current economic conditions. Commercial closings fell in the second quarter, but the number of applications began to increase going into Q3. Retail and hospitality lending is expected to remain subdued for the time being as underwriting has become notably more conservative. FHA, Freddie Mac, and Fannie Mae remain active, which provides an advantage to multifamily relative to other asset types. Banks are continuing to finance multifamily with a decrease in marketing endeavors and an increase in the requirements for reserves.

multifamily real estate

Investing

In Q2, institutional investors, public companies, and international capital stepped back while private investment remained strong. Similar to the previous recession in the U.S., multifamily should recover faster than other asset classes. Rent is expected to stabilize by the end of the fourth quarter, at which point public investors are expected to reenter the market. Property pricing will likely exceed 2020 levels in the multifamily sector in the first quarter of 2021, but projections for total investment in 2020 are currently less than half of what was seen in 2019.

multifamily real estate

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