Multifamily

There is potential for a major disruption within the multifamily market across the U.S. as a result of the COVID-19 pandemic, as many Americans will struggle to pay their rent on time, if at all. While only 69% of renters paid rent within the first week of April, according to data collected by the National Multifamily Housing Council. By April 19th, that percentage had risen to 89%, and then to 93% by the last week in April. As compared to a pre-COVID-19 95% average collections, April proved to be welcome news from the perspective of landlords across the country. Attention turns to May collections, and subsequently June, where expectations are not as sanguine, especially as stimulus checks and unemployment benefits have been delayed and where the vast majority of renters live paycheck to paycheck. Many analysts project that the situation for most renters, despite a second round of fiscal support, will continue to worsen with extended furloughs and layoffs. A ubiquitous pause in multifamily asset and land sales is underway. Many capital markets professionals across the U.S. note delays in closings, stops in widely marketed sales, and a 7%-10% discount in underwritten values. Flattening rent growth projections, collections risk and reduced financing proceeds are primary factors. This is more anecdotal than fact as the number of sales closings which were initiated since COVID-19 are relatively few. Lenders are also shifting risk onto owners by expecting one year of debt servicing escrowed up front. Publicly traded owners are currently halting dividend payouts, with many contacts noting halts of 90-days. The market remains highly liquid with buyers still seeking acquisitions; however, the expectation is for ‘a good deal’, a euphemism for ‘a discounted deal.’ Rent growth has halted and may turn negative in several markets, at least for a period of time. Landlords are forced at the moment to deal with tighter budgeted, more fiscally cautious renters. Multifamily is likely to become a more vulnerable and volatile property type in the coming months, as the financial situation of millions of renters worsens. But demand will remain strong. Construction delays across the country have put additional pressure on an already constrained supply. Expect the multifamily market situation and outlook to be ever evolving through Q2 and Q3.

Looking ahead, five potential trends to monitor are:

• Will delinquency expectations vary across asset class? To date, the data shows no meaningful difference between Class A properties in high priced urban city centers and more affordable properties with a workforce housing tenancy.
• Shifts in amenities for new construction – how will COVID-19 impact the amenity/service mix provided by developers to better meet the new sensibilities of tomorrow’s renters? How will work space be redefined within Multifamily if Monday – Friday, 9am to 5pm at an office is no longer the work reality for many more millions of renters?
• The rise of multiple months of free rent for renewals and new leases, as landlords fight to attract and retain renters.
• Will townhome product become more popular and high-rise product lose favor given the new practicalities of living, working and sharing spaces?
• Will the risk investment profile for multifamily shift? How will capital providers alter expectations, as there are counter arguments for both lower and higher cap rates as the future unfolds.