How have the pandemic conditions resulting from COVID-19 impact the multifamily real estate market? The market data continue to be aggregated and analyzed and as of late Summer 2020, several interesting trends are developing.
Most importantly, the dire sector predictions of adverse outcomes for apartment owner/operators of rampant non-payment of rent and mortgage delinquencies have not occurred. The economic down turn that has occurred since mid-March has resulted in over 50 million unemployment claims over this period. This economic downturn is the result of the mandated closing of schools, businesses and business and leisure activity. Government unemployment benefits and direct stimulus programs to businesses and individuals have provided a backstop against the potential down turn which would have otherwise resulted from a lack of cash flow.
Commercial real estate property values have not changed significantly during this period. The volume of transactions changes hands, however, slowed dramatically through the end of the second quarter of 2020. This was in response to the volatility in the markets and mortgage rates. On the positive side, rent collections have remained strong. According to a rent collection survey conducted by the National Multifamily Housing Council of over 11.4 millions rental units, full or partial rent was collected on 93.3 percent of these units as of the end of July 2020 and 92.1 percent as of the end of August 2020. Encouragingly, this represents only a 1.9 percent decrease from the end of August 2019. (1) Going forward, the combined results related to the resumption of economic activities, the possibility of additional government provided unemployment and stimulus activities, and vaccine and other therapeutic break will influences these numbers.
Even though only a small change in rent collections was reported, other interesting trends in rent collections are noted. First, the asking rents or rent growth during this period decreased by 0.7% instead of increasing by its normal average of 2% in the second quarter according to YardiMatrix. Because Spring is a period of high turnover in rental units, Yardi reported that for the prior five years rent growth normally increased 2% during this quarter. These decreases in rent growth aren’t affecting markets uniformly, but rather appear to be affecting markets with high base rents (large cities on the East and West coast) and markets with fast growing populations.
Rental growth changes have also differentially affected apartment classes. Luxury or class A rentals have been affected the most with a decrease in rental growth of 1.8% over the prior year. For multifamily assets serving renters-by-necessity rent growth was increased by 1.4% over the prior year as demand for these more affordable units was actually increased during the period.
Another trend attributable to the pandemic-induced shutdown of economic activities is that development and delivery of new apartment complexes (Class A apartment) to market will be significantly delayed. Units already under construction at the time of the pandemic will be completed but not until later in 2020 and early 2021. For projects in the planning and permitting phases, it is expected that developers will delay proceeding to the building phase until 2021 to see what future economic conditions and rental trends bring. The resulting decrease in supply of new units may result in continued upward pressure on rents and occupancy in existing Class B assets
Sales of existing complexes declined dramatically during the second quarter with only $7.8 billion in sales in comparison to the 23.1 billion in sales in the the first quarter of 2020. This was a result of uncertainty in asset valuation resulting from unpredictability of impacts on future cash flows. Additionally, commercial lenders are requiring added cash reserves raised to protect against the risk of defaults (2).
To learn more about the historical performance of investments in multifamily real estate relative to stocks and bonds during prior down turns, Download my ebook or schedule a call.
Stevan Gilmore,
Principal, Shift Change Capital
(1) https://www.nmhc.org/research-insight/nmhc-rent-payment-tracker/