Multifamily Industry – 2020 Market Report (Trends, Outlook, News)June 28, 2020
The pandemic is no hoax. It has had a disastrous impact on the U.S. economy. However, the current bleak situation will eventually resolve, making it a great time for opportunistic purchases. Read on to learn the latest facts and outlook for the multifamily industry.
Video: Yardi Matrix May Update: COVID-19’s Impact on Multifamily Real Estate
Multifamily Industry Quick Facts
The multifamily industry is currently contending with these important factors:
- COVID-19 will have a short-term impact on our economy such that multifamily vacancies will increase and rents will decrease. Vacancies may increase to 6.3% by 2020 Q3.
- The economy may begin to recover by year’s end, especially if a vaccine becomes available. Under the best circumstance, vacancies may fully recover in 2021. However, the impact may linger for many years to come.
- Rents may drop 6.7% in 2020 Q3 and bottom out in Q4. Rents should recover by 2022 Q2.
COVID-19 dominates the recent trends in the multifamily industry. For example, check out the National Multifamily Housing Council’s (NMHC) Quarterly Survey of Apartment Market Conditions for April 2020. Four indexes that reflect the health of the market all show levels significantly lower than breakeven. These indexes are:
- Market Tightness: The reading dropped from 48 to 12, indicating that there are ample units available to renters.
- Sales Volume: This indicator cratered from 43 to 6, showing that the volume of sales was weak.
- Equity Financing: First-quarter 2020 equity financing dropped from 61 to 13. This broke a 10-quarter uptrend.
- Debt Financing: Debt financing crumbled, sliding from 68 to 20 and indicating a radically different supply/demand balance.
These readings reflect a wait-and-see attitude among potential renters. Part of that is due to the directives to stay at home. In addition, financial insecurity and the huge unemployment surge has reduced the number of people looking to move. The result is that 82% of survey respondents reported loose market conditions.
Investors wanting to purchase multifamily properties are actively looking for bargains. However, few sellers are willing to accept lower prices. Of course, this may change as the pandemic drags on.
We should point out that the multifamily sector appears to be more stable than other real estate sectors. Part of this is due to government subsidies, although their future is uncertain. Tenants often prioritize rent payments in order to avoid eviction. Nonetheless, tenants who run out of money may move soon after the current moratorium expires in August.
Underwriting standards for the multifamily industry are now tighter. Nonetheless, lenders remain fairly active in this space.
Enthusiasm for value-add properties has waned. Difficulties in implementing improvements is driving a preference toward the purchase of stabilized rentals with immediate cash flows.
Outlook for 2020 and Beyond
Typically, the U.S. multifamily industry is resilient and snaps back quickly from economic shocks. However, the pandemic has cast a pall upon the industry for now. That’s not to say that there are no green shoots hinting at better times to come. The industry’s resilience is due in part to demographic trends that support multifamily demand. The rise in work from home may manifest in the desire for flexible renting rather than locking in ownership. Moreover, graduating students with high debt are less likely right now to qualify for mortgages.
Long-term investors in the multifamily industry should be aware of several positive factors, including:
- REITs and pension funds will continue to favor multifamily real estate during volatile periods.
- Rock-bottom interest rates will encourage long-term investors.
- Landlords should experience lower tenant turnover, reducing the capital and operating costs for recruiting new tenants.
- Work-from-home encourages young professionals to demand apartments.
- The decline in construction will help keep multifamily vacancy rates low.
Potential investors should pay attention to the quality of the multifamily properties they consider. Class-A properties often house workers in the best industries. Therefore, Class-A apartments should do better than Class-B and Class-C units. The lower-class properties often house workers in vulnerable sectors, such as food and entertainment.
Travel has suffered deeply within the United States, with negative effects devastating travel-dependent regions. These areas include New York, California, Hawaii, Florida, New Orleans, and Las Vegas. Except for New York and Hawaii, these regions are all battling record COVID-19 cases right now. Thus, it may be more attractive to seek properties in other areas of the country.
Congress imposed a three-month moratorium on evictions due to the pandemic. This phase will end shortly, allowing landlords to get rid of deadbeat tenants and replace them with better ones. This will strengthen the industry in the long run.
Similarly, the CARE Act will soon run out of funds, plunging millions into abject poverty unless renewed. If the Senate fails to extend unemployment benefits and loan guarantees, expect many homeowners to default on their mortgages. This will create new demand for rental properties and help them maintain high occupancy rates.
Another interesting factor is the adoption of no-contact multifamily property management, such as that offered by Onerent. These companies allow tenants to find, view, and lease apartments without human contact. These same companies provide property owners with contactless management functions. In other words, all parties benefit by the advent of no-contact multifamily property management.
Contactless renting relies on many types of gadgets. These include:
- Automatic rent collection
- Drone footage
- Keyless entry
- Online leasing
- Remote HVAC and lighting fixtures
- Smart lockboxes
- Water/moisture sensors
These devices support the tenants’ need for social isolation and provide cost savings to property owners.
Current Multifamily Industry News
HousingWire reports the following multifamily industry news:
- Landlords in California and other metro areas cut rents by 3% to 9.2% in May 2020.
- New York City has approved a one-year rent freeze on multifamily rentals.
- 89% of renters occupying professionally managed units are current on their rent. Class A properties had the highest percentage (90.4%), while Class C came in at 84%.
- Asking prices for multifamily properties dropped for the first time in the last decade.
Another report shows that 38% of renters will need relief in the next 90 days. And 42% of tenants were unsure about their future rental stability. A third survey reveals that almost 36% of respondents with leases expiring within six months plan to move. One reason is the need for more space for work-at-home renters. A majority of renters (60%) are amenable to contact-free renting.
Helpful Online Resources
Here are some popular resources for the multifamily industry:
- Library of Congress
- CCIM Institute
- National Apartment Association
- National Multifamily Housing Council
- Assets America®
How Assets America® Can Help
Whether you are looking to build, renovate, or purchase a multifamily property, Assets America® can help. We place debt starting at $10 million up, with virtually no upper limit. Please contact us for a confidential conversation about your needs. We have the knowledge and expertise to arrange financing promptly and efficiently, without the typical long-term delays required by conventional sources.
Frequently Asked Questions
How will a nonresidential construction boom affect the multifamily industry?
This is a moot question right now because all real estate construction is depressed. In general, nonresidential construction is positive for the multifamily industry. That’s because it creates demand for new worker housing.
Where can I find regional market reports?
One excellent source is CBRE. It offers regional reports by region, county, and city. For example, its Southeast Regional Report covers Atlanta, Greenville, Charleston, Jacksonville, Nashville, and many more locations.
How can I effectively invest in apartment buildings?
We invite you to read our article: Complete Success Guide to Investing in Apartments. We carefully lay out the important factors you should consider before you commit investment funds to multifamily properties.