Amid the ongoing pandemic and economic sluggishness, skeptical lenders and equity investors are expected to continue looking favorably on multifamily as one of the more durable property types.
As more vaccines are administered, the mountains of cash sitting on the sidelines should begin to flow, and multifamily will be one of the main recipients of that capital, followed by industrial. But, for at least part of the year, multifamily will be beset by some of the challenges impacting commercial real estate in general. Here are the major trends likely to influence the capital markets in 2021:
1. Pandemic persists
While vaccinations have started, distribution will take at least several months, and the pandemic’s effects are expected to continue through that time.
The Mortgage Bankers Association estimated in July that 2020 lending will be down by almost 60 percent from a record $601 million in 2019 and forecast only a partial rebound in 2021. The release of the vaccine has not really impacted that prognosis.
The pandemic is still very active and will continue to affect different property types, according to Jamie Woodwell, vice president of commercial real estate research at the Mortgage Bankers Association.
2. More multifamily, please
Construction loans in the multifamily space have gained popularity during the pandemic and will likely continue to attract lenders from all points of the capital universe. Along with industrial, multifamily has been a top-performing property type for rent collections and investment volume.
CBRE forecasts multifamily investment volume will reach $148 billion in 2021, for a 33 percent increase over the 2020 estimate of $111 billion. Brian Stoffers, global president of debt & structured finance for CBRE, predicted that 2021 will see more multifamily lending from non-government-sponsored enterprise lenders. “Life companies should see higher multifamily volumes in coastal cities and in higher-end product,” Stoffers said.
Banks have typically capped around 50 percent of cost during the pandemic, leaving opportunities for other capital providers. Madison Realty Capital, the New York City-based private equity firm that launched a $1 billion-plus investment fund during the pandemic, has been active in the space providing whole construction loans of up to 75 percent or so of cost.
“We’ve done a ton of deals in New Jersey,” said Madison Realty Capital Co-Founder Josh Zegen. “Generally, there’s been a trend towards people pushing out into (not only) transit-oriented locations in New Jersey but places that were a little more suburban, like Woodbridge and North Bergen, N.J.”
In the fourth quarter, Madison closed a $165 million construction loan for a Boston apartment building next to Fenway Park and a $173 million construction loan for an apartment building in Chelsea.
3. CMBS finds comfort zones
Commercial mortgage-backed securities have been very stressed in 2020 but will do better in 2021 as investor demand continues to return. “With high investor demand and lower spreads, CMBS should pick up market share on product that is desired by investors, such as industrial, multifamily, long-term leased office, grocery or low-leveraged leased retail and conservative hotels,” said Stoffers.
Moody’s director of CMBS/CRE Research Kevin Fagan said Moody’s concurs. “Investors in commercial real estate and CMBS are closer to seeing the light at the end of the tunnel, and it’s clearer that the economic stress is likely to remain hyper-focused within businesses that are reliant on travel and group congregation (mainly lodging and regional malls in commercial real estate),” Fagan said.
There is growing opportunity, then, for collateral in multifamily, industrial, office, self storage and some lockdown-resistant retail that could be comfortably underwritten into CMBS deals.
4. Rescue funds ready to roll
How developers and property owners get to the other side of the pandemic will depend on their ability to stay afloat, and many will rely on the rescue capital being raised to profit from the disruption in the hotel and retail markets.
“Certainly, there’s been an awful lot of money raised to invest in distressed properties,” said Woodwell, “and that can be invested through purchasing distressed loans or buying foreclosed properties by putting preferred equity in place if the current property owner just needs a slug of cash to sort of get through the pandemic.”
Distressed buying and lending is expected to pick up in the first and second quarters of 2021 when banks and funds finally throw in the towel on forbearance agreements with borrowers and sell the loans. Some of that activity has already begun.
“We’ve seen that trend in terms of note-purchasing opportunities,” said Zegen, whose firm has lent to others buying distressed notes and acted as a partner in rescue financing as a preferred equity investor.
Bridge lending will account for a lot of the distress and rescue investing, said Matt Stearns, a senior managing director at Black Bear Capital Partners. “There’s going to be a massive amount of bridge lending for distressed assets about to come online,” Stearns said. “This will be across most asset classes, however, retail and hotel will see the largest amount of distressed opportunities.”
5. Capital galore
Unlike the Great Recession, which was devoid of capital, this market is awash in both equity and debt seeking yield.
“If you have a stable property, this is the time to get long on the yield curve like I’ve never seen,” said Raymond Zanca, a senior managing director at Black Bear Capital.
Not only are multifamily rates in historically low territory but lenders are also seeking industrial opportunities, though spec development is more conservative and will have a greater equity requirement. Refinancing stabilized industrial is “as attractive as it’s ever been,” Zanca noted.
Just behind multifamily and industrial, lenders have shown a new appreciation for suburban office. Locations that may have been on the chopping block are now keepers.
Many tenants with leases up for renewal are rotating into their suburban locations.
6. Urban boomerang
The crisis has taught us that many jobs can be done remotely. Suburban office is expected to recover faster than urban office following the mass exodus from some of the major cities to the suburbs.
But the younger workforce, many of who moved out of their apartments to live with their families in the suburbs to save money, should head back to these cities as offices begin to reopen, according to Al Brooks, head of commercial real estate for JPMorgan Chase.
“They will want to get back to the live-work-play environments that attracted them there to begin with,” Brooks said. “Major companies are betting on that, too, as they have continued to locate and expand their presence in these cities to be able to attract top talent.”
7. Higher reserves
Based on a more conservative analysis of rent growth and lease-up periods, the amount of time borrowers need to sock away carry costs until their properties are cash-flowing will generally be higher than before the pandemic.
“It’s very specific to each asset; it’s hard to paint the brush over all of them because every asset has got its own story,” said Joseph Iacono, CEO & managing partner of Crescit Capital Strategies.
The increase, however, can be substantial—a reserve that might have been 18 months before the pandemic could now be 20 months, 24 months or even 30 months, depending on the situation.
8. Price discovery
There will be greater price discovery in 2021, but it will be uneven. Multifamily, industrial and some of the more specialized property types—like self storage and data centers—have gotten a lift from the pandemic. Retail and hotel assets, on the other hand, are in for a bumpy ride.
Retail rents will see long-term changes, and in places like New York City are likely to be completely repriced. Hotels, another casualty of lockdowns, are being repurposed to multifamily in states like Texas and Florida but won’t be rescued so easily in instances where zoning and/or unions prevent such conversions.
“In some cases, we may not like that price discovery,” said Iacono. “Today we suspect they’re worth less because of what’s happening, but we haven’t seen many trades to verify how much less.”
Even if the prices come in low initially, he said, those prices will likely recover pretty quickly because there’s a lot of equity on the sidelines to buy.
9. Attention on affordable housing
The shortage of affordable housing in the United States—estimated to be 7 million rental homes short by the National Low Income Housing Coalition—has only been exacerbated by the pandemic.
“The COVID-19 pandemic and the economic downturn that followed have brought renewed attention to the affordable housing crisis,” said Brooks. “We need to put everything on the table, from rethinking how we build and finance affordable housing to how the public and private sectors collaborate.”
Going forward, Brooks believes it will be important for government, business, and nonprofit industry players to come together to find creative solutions to invest resources and equity into solving this complex issue. JPMorgan Chase recently announced a $30 billion business commitment—which includes loans, equity and direct funding over the next five years—to provide economic opportunities to Black and Latinx communities.
10. Warehouse lending
Given the extreme uncertainty and exposure to nonperforming property types like hotel and retail, many banks pulled back on their warehouse lending—credit lines that are extended to borrowers and then sold on the secondary market either directly or via securitization. But lenders are expected to reinvigorate their warehouse businesses.
“Because of where they play loan-to-value-wise, by the time they’re done with their haircuts, it’s a safe risk and a good return on equity for those banks,” according to Iacono.
He believes that while banks will come through the pandemic seeing a good performance “to their last dollar” in their warehouse lending, borrowers may not see a full recovery.