COVID-Fueled Weakness to Last Through 2020

The pandemic has exerted a pronounced impact on the multifamily industry, resulting in increased vacancies, marginally lower rents and negative gross income growth anticipated to persist through year end. This and several other key revelations are contained in the just-released Multifamily Midyear Outlook from Freddie Mac’s Multifamily Research Center. Early last month, the GSE augmented its multifamily forebearance program.

The multifamily market turned in a solid performance through the end of last year and into 2020’s first quarter. But in seeming lockstep with the emergence of COVID-19, the second quarter witnessed an erosion in fundamentals. RealPage reported a 4.4 percent first quarter vacancy rate, and rents up 2.9 percent annually. In the second quarter, rent growth fell 1.0 percent, while vacancy rates ticked up. According to Freddie Mac Multifamily, vacancy rates will end 2020 up 200 to 250 basis points. Rents will be down 1.2 to 1.7 percent by year’s end, with the result that gross income growth will be -3.3 to -4.2 percent.

Given prior years’ above-average income growth and property price appreciation, well-positioned assets won’t likely be impacted by declines in income growth and collections.

The CARES Act’s benefits were part of the reason for second quarter collections that were off only 3.1 to 0.1 percentage points, compared with the previous year, the outlook’s authors reported. But they added if jobless rates stay high, renters who already face a greater cost burden than their owning counterparts could find it increasingly difficult to make rent payments. Projected gross income declines and lowered collections aren’t likely to affect the ability of well-positioned properties to pay monthly debt and expenses.

Tied to recovery

A number of macroeconomic forecasts predict multifamily origination volume to drop 20 to 40 percent from 2019 to 2020. The extent of the decline will depend on the economy’s recovery and how well the virus can be contained. In spite of lower overall volume, Freddie Mac’s role in the market to deliver liquidity in the midst of weak economic environments will keep its volume steady, even as other financial institutions retreat from the market.

That multifamily entered the recession on solid footing after several years of substantial growth will help the industry absorb the recession’s impacts, the authors concluded.