With so much economic doom and gloom perpetuated in the news, the past few months have actually been stable in the multifamily property arena. Compared to 2019, rental trends are only slightly lower during this global pandemic. Even with well over 10 million unemployed people, multifamily property owners have still been collecting rent in a fairly normal fashion. With record job losses and economic turmoil, how does this happen?
WHAT CONTRIBUTED TO 3 MONTHS OF STRONG PERFORMANCE?
1. FEDERAL & STATE FINANCIAL ASSISTANCE. With stimulus checks and $600 weekly unemployment payments, the federal government, coupled with individual state assistance, has aided Americans in paying the rent over the past few months. For most Americans, these benefits ended in July, but President Trump extended the benefits through the rest of 2020, with an additional $400 per week in unemployment payments to individuals. On August 8th, the Trump Administration issued this extension with little push back from Congressional Democrats. It appears that this executive order will bridge the gap, until early 2021, when either a new stimulus package or a vaccine arrives.
2. CONSTRUCTION DELAYS KEEP MULTIFAMILY DEMAND HIGH. Delays in the construction of multifamily housing units have continued to keep rental demands high. In April, a survey released by the National Multifamily Housing Council found that 56% of multifamily developers were experiencing construction delays. 77% experienced delays in permitting and 70% were experiencing delays in construction starts. These delays compound the already unmet need of multifamily housing. The National Apartment Association estimates that the U.S. needs 325,000 new units, per year, just to keep up with demand. Over the past decade, the closest that the U.S. has come was in 2017, when only 282,000 units were built.
3. MULTIFAMILY UNITS ARE SAFER THAN RETAIL OR OFFICE UNITS. During this pandemic, retail spaces suffer as shopping moves evermore online and office spaces go dark as work is completed from the comfort of home. Multifamily units remain stable because people will always need a place to live. With most multifamily-dwellers, rent is the first expense prioritized when jobs are lost and income is throttled down. During this time, people are staying put and placing even more value on their living spaces. Turnover rates have been dropping to levels not seen in decades. According to the Census Bureau, the rental turnover rate dropped, from 47.5% in April 2019, to 42.1% in April 2020. This is the lowest level on record, in over 20 years and likely a result of tightened budgets and a lack of major rent increases on renewals.
WITH RENT PAID AND HISTORICALLY LOW TURNOVER, WHAT DOES THIS MEAN FOR MULTIFAMILY INVESTORS?
1. Housing payments remain a priority for tenants, especially as some states proceed with evictions.
2. Significant decreases in turnover can halt renovations and therefore halt rent increases. Hiccups in planned rent growth, within a pro forma, can cause major issues in projected returns, especially when the disruption happens in the beginning of the projected hold period. Therefore, we could see numerous multifamily investors fall short on IRR and equity multiple projections on properties acquired in 2019 and early 2020.
3. Decreases in tenant turnover also decreases the cost associated with move-outs and will give investors a slight boost to NOI, at a time when it’s likely needed.
4. Demand for multifamily units came into the recession strongly and it will likely remain solid as we work towards economic recovery. Over the next few years, short-term demand may fall, but it is not expected to have a lasting impact on long-term demand for rental housing as new construction remains difficult.
5. Low interest rates continue to prop up property values, allowing many investors to underwrite targeted return metrics by placing long-term debt on new acquisitions at sub-3% interest rates. Large investors are even able to secure full-term, interest-only payments on 5 to 10 year loan terms. This also produces strong cash-on-cash returns, even for properties that are trading at a 4.75 - 5% cap rate.
6. Many groups are still trying to put out capital and are looking to take advantage of low interest rates. This has prevented prices from adjusting, and has prevented value from dropping significantly in the multifamily space. It appears investors will have to wait a bit longer, continuing to be patient, if you are a multifamily investor looking for discounted pricing during our economic situation.
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