Unlike the office, industrial, retail and hospitality sectors that have been directly affected by the outbreak, the multifamily segment appears to be more stable during these trying times.
Pathfinder Partners Senior Managing Director & Co-Founder Mitch Siegler has vast experience in developing financial and business structures and strategies. He has negotiated and structured more than 100 real estate transactions and 50 corporate mergers, acquisitions, financings and financial restructurings. Siegler weighs in on five trends that multifamily investors should focus on today.
1. The unemployment effect
Data from the Bureau of Labor Statistics shows that the U.S. unemployment rate spiked to 13.3 percent in May due to the coronavirus outbreak. The number of unemployed workers is said to be higher in the three months of COVID-19 than it was during the two years of the Great Recession, which pushed the unemployment rate to 10.6 percent as of January 2010.
But what could this historic unemployment mean for the multifamily sector? “The apartment sector has held up quite well so far. Tenants have been paying their rent, which suggests that they’re prioritizing a roof over their heads. Tenants are also staying put—apartment turnover fell to 42 percent in April, down from 47.5 percent in 2019 and the lowest level in 20 years,” Siegler said.
The biggest effect unemployment has on multifamily is the inability of some residents to pay their rents. According to the Multifamily Housing Renter Perspective Study, released this month by Assurant, 42 percent of renters were unsure about their rental stability going forward, and 31 percent of renters were unsure they could make their next rent payment on time. Also, 17 percent said that they could not cover their last rent payment, the U.S. Census Bureau’s Household Pulse survey in May showed.
2. Suburban investment
The trend we saw in 2019 where smaller multifamily markets began attracting more and more capital continued this year. The affordability of these secondary markets has led to population and job growth. In major urban areas, the suburbs are making a comeback and the pandemic is only adding fuel to the fire.
“We expect some trading down from the Class A to the Class B sector and some migration from central business districts to the suburbs. The latter is likely to be driven by increased ability to work from home and a desire for more open space and less density,” Siegler explained.
3. Financing remains available
Despite an economic hiccup throughout the country, multifamily investors remain somewhat active and continue to rely on financing sources such as Fannie Mae and Freddie Mac. The government-sponsored enterprises have provided and continue to provide low-cost, long-term apartment financing, even in these trying times. But that’s not all.
“Commercial banks also remain active in this space, as do life insurance companies. Multifamily has been one of the most resilient real estate sectors and financing remains available, though underwriting has tightened,” Siegler said.
4. Shifting strategies
For a long time, strategic investors were interested in value-add properties for their potentially higher returns. According to Siegler, interest for value-add started to decrease before the coronavirus outbreak as “the premium for doing the work, taking the risk and deferring cash flow for several years had shrunk to a point that it was hardly worth doing it—relative to simply buying a stabilized apartment property—except in rare circumstances.”
Pathfinder Partners’ response to this new trend was to launch a fund. “We recognized this shift in 2019 and launched Pathfinder Income Fund in January to focus on core apartment properties in our six Western U.S. target markets— Seattle, Portland, Sacramento, San Diego, Phoenix and Denver,” Siegler said.
5. Growing use of tech
Investors, brokers and property managers need to find a way to keep their businesses going, even in times like these when social distancing puts pressure on closing deals. Here comes technology to help save the day. The use of virtual tours and virtual leasing has grown exponentially in the past few months and the trend is only expected to grow even if the health crisis passes.
“Fewer tenants wanted to meet a leasing agent for a guided tour. More wanted a do-it-yourself approach—touring a digital version of the unit online, and, when necessary, taking a self-guided tour,” Siegler added. “In response, we have been implementing virtual leasing platforms at our properties, including virtually staged units and virtual common area amenity tours.”