The State of the Market Today: What Does Multifamily Look Like Going Forward?
Despite only being a few months into the year, 2021 is already looking up. CDC guidelines have begun to loosen as an increasing number of people around the country have received the Covid-19 vaccine, and other countries have indicated they may allow Americans to travel as early as this summer. As individuals become increasingly comfortable with spending time in cities, attending larger gatherings, flying, and participating in other activities, it only makes sense that many will become more comfortable with the idea of moving as well. So, what do all of these changes mean for the multifamily market going forward?
Rental Performance Remains Strong
According to the National Multifamily Housing Council (NMHC), which tracks professionally managed apartment units across the country, 95.9 percent of households made rental payments in March 2021. This is a considerable change from 2020, when an estimated 27% of renters across the country missed their rent or mortgage payment in July 2020, according to the U.S. Census Bureau. Ellie Perlman, Founder, and CEO of Blue Lake Capital LLC, reported that Class A and Class B properties were performing well in the market in 2021 and her firm has continued to collect between 95% to 100% of rents each month. Perlman also expressed they have raised rents from 6% to 12% depending on the asset, indicating strong gains throughout the rest of the year.
Limited Construction Leads to Higher Demand
Deliveries for new construction projects were significantly delayed due to Covid last year, while others were canceled altogether. This had a substantial impact on new development, pushing back many multifamily projects. There were also higher costs for lumber and construction labor as well as regulatory delays, which further postponed many development projects. As a result, inventory is much lower than it would be normally, which has led to an increase in demand. For investors, limited inventory coupled with high demand offers the opportunity to increase rental rates more than they typically would otherwise.
However, with that being said, construction is seeing a resurgence in 2021, so investors who are hoping to lock in higher rental rates will probably want to act sooner rather than later. According to Realtor.com, the U.S. Census Bureau reported that builders applied for 14% more permits in 2021 versus 2020, indicating that inventory will most likely begin rising again.
Strength in the Southern Markets
Covid led many individuals in pricey coastal cities to flock to the southern states which tend to offer more outdoor space for safe gatherings, cheaper prices, and larger units. As many individuals shifted to working from home full-time, they found themselves in need of more space for a home office, which led to moving to less expensive cities where they can afford more space at a reduced cost. Many individuals left the most expensive cities in the country, including San Francisco, New York City, Los Angeles, Seattle, and others, and moved to less costly areas such as Dallas, Charlotte, Atlanta, Tampa, and Phoenix.
According to MyMove.com, which collects United States Postal Service change-of-address data, over 15.9 million people moved during the pandemic in 2020, which was a 3.92 percent increase from the same period in 2019. The states who saw the highest gains included Texas, Georgia, Florida, and Indiana. The only non-northern area that made the list was East Hampton, New York, due to the influx of individuals leaving New York City for the Hamptons. Katy, Texas – which is located just outside of Houston – saw the highest influx of movers according to MyMove.com’s data, followed by Richmond, TX and Frisco, TX.
Unemployment Continues to Drop
As GDP continues to recover and the economy stabilizes, unemployment has continued to drop as well. As of now, unemployment is currently at 6 percent, a considerable change from 14.8 percent in 2020. As restaurants, hotels, retailers, and other businesses begin to open their doors at full capacity, additional job opportunities will become available, which will hopefully bring unemployment numbers down even further. The drop in unemployment coupled with the recent stimulus checks, extension in $300 supplemental payments to qualified individuals, and the continuation of unemployment benefits through September 6th are all positive signs for investors seeking tenants with a steady income.
Renting Units has Become Almost Entirely Virtual
If the pandemic taught us anything, it is that business doesn’t stop just because we can’t complete transactions in person. With the rise of virtual rental tours via Zoom, FaceTime, etc. as well as self-guided tour technology, renters have become increasingly comfortable signing leases for apartments without actually touring them in-person. This has helped investors rent units faster and has limited the number of real estate agents and other individuals needed to get leases signed.
Interest Rates on Multifamily Lending Reduced
2019 saw record all-time highs for multifamily lending, with multifamily originations reaching an impressive $59.2 billion. While 2020 was projected to surpass those numbers, Covid had other plans. As of now, LTVs and LTCs are reduced, bringing leverage approximately five percent lower than where it was prior to the pandemic. Fannie Mae and Freddie Mac have played a significant role in this, as they have eased up on their requirements significantly. While 9 to 12 months of principal and interest reserves were previously required, Fannie Mae now only requires six months of interest and Freddie Mac waives the interest requirement altogether if the LTV is below 65 percent. To put that into perspective, lenders previously had LTV requirements closer to 70 or 80 percent. According to CBRE, multifamily investment volume will reach approximately $148 billion this year. While this is lower than 2019’s record $191 billion, this is a considerable jump from the $111 billion we saw in 2020.
While there is certainly optimism in the air with the increase in vaccinations across the country and reduced restrictions by the CDC, investors should bear in mind that the impact of Covid-19 will have long-term effects on the real estate market. Investors certainly shouldn’t expect to see the same gains experienced during the pre-pandemic era right off the bat, as it could take a considerable amount of time for the country to fully reopen and gain some degree of normalcy. As with any real estate endeavor, those who are willing to keep their money in the investment over the long term will see the highest returns.
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