How Apartments Have Prevailed During the Pandemic
IMG's Karlin Conklin on why real estate investors have chosen multifamily as a best-bet asset class.
Earlier this year, a leading equity crowdfunding site conducted what’s believed to be the largest-ever survey of individual real estate investors in order to gauge their appetite for investing in a pandemic. Despite the economic volatility, nearly all of the 1,240 investors surveyed (96 percent) plan to add commercial real estate to their portfolios in 2021.
Notably, a whopping 90 percent said they were likely to invest in multifamily. For comparison, less than half of investors expressed interest in office investments (47 percent), and even fewer were likely to consider retail (25 percent).
Given the challenges of the last 18 months, how has investor confidence in rental housing remained so strong? Multifamily was certainly not immune to the impacts of COVID-19, but it does have several strategic advantages.
Critical Piece of Infrastructure
The renter demographic was particularly vulnerable to the COVID-19 crisis. Congress moved quickly at the start of the pandemic to establish expanded unemployment benefits, stimulus checks, and nationwide eviction moratoriums in an effort to ensure that America’s renters didn’t lose their homes.
Investors took notice that the government was investing in housing as an integral part of a pandemic recovery strategy, unlike any other CRE asset class. Maintaining an affordable housing supply is a vital component of the American economy. As with any type of commercial real estate, multifamily investors take on risk. But historically, they’ve made a fair return on their investment. The ability to make a positive impact in the infrastructure of local neighborhoods and economies continues to win investors.
Hands-On Value Creation
Another winning quality is multifamily’s relatively low barrier to entry. Many apartment investors get their start in real estate purchasing a single-family home or duplex. New owners can then add value to their property through their time, expertise, and hard work. This “sweat equity” grows over time and results in a larger portfolio, increased returns and greater value appreciation.
But let’s be honest: Being a landlord isn’t easy in a good year. The pandemic ignited a boom in a sweat equity strategy known as multifamily syndication, where investors pool their money to purchase apartment communities, and a sponsor manages the property’s rehab business plan and oversees daily operations.
Multifamily benefits from the most favorable financing treatment of all real estate asset classes, oftentimes receiving the most competitive interest rates and longest amortization periods.
This favorable environment is led by agency lenders, which were originally created to support housing stock. Freddie Mac was chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing. It, along with Fannie Mae, has the mission is to provide liquidity, stability and affordability to the U.S. housing market.
When the pandemic hit, Congress recognized the role it and the agencies could play to enhance housing stability and keep renters in their homes. A critical component of the CARES act of 2020 helped multifamily borrowers with agency loans by providing a forbearance period at no penalty. Loan payments could be deferred by up to a year while property rents stabilized post-pandemic. Because of this treatment in the CARES act, the multifamily industry weathered the worst of the pandemic.
History tells us that during recessions, multifamily housing production contracts moderately, rent declines are short lived, and vacancies only increase briefly and by modest amounts. Recent headlines reflect the same resiliency in these metrics in a pandemic slowdown. Looking ahead, investors will continue to inject funds into apartment assets as a winning bet to yield successful returns over the long-term.
Karlin Conklin is principal & co-president of Investors Management Group Inc.