At the beginning of 2020, industry experts predicted another strong year for the multifamily business, with positive occupancy and rent growth across the country. However, the pandemic has destroyed the strong economic fundamentals and exacerbated issues that were long lingering over the industry.
“The country is experiencing an affordable housing crisis in nearly every city,” said Al Brooks, head of commercial real estate for JPMorgan Chase. With some 13.6 million Americans unemployed as of August, according to the U.S. Bureau of Labor Statistics, the need for low- and moderate-income housing is more evident than ever.
In the interview below, Brooks provides insights into the current state of housing across the country and dives into what needs to be done to eliminate the barriers around building for low- and moderate-income renters.
What were your expectations for the multifamily sector at the beginning of the year and how has the pandemic overthrown them?
Brooks: The commercial real estate market was performing well leading into 2020, and the multifamily space, in particular, was seeing increasing activity. The pandemic put a wrinkle on all our plans, impacting all industries. On our multifamily projects, so far, the vast majority of clients are supporting their loan based on the support of their tenants. Part of what has helped commercial real estate stay healthy is that a good amount of building owners are still making their mortgages and rents. The multifamily space received a stimulus boost, but as the stimulus runs out, it will be important to see what will happen from here.
We have seen rates dropping as a result, bringing some opportunity. When it comes to how specific markets will perform, it largely depends on the market and industry focus. For instance, the major metros—New York City, the Bay Area, Los Angeles, Chicago—are supported by more diversified economies versus markets like Las Vegas that have been affected by the slowdown in the travel and hospitality industries.
Last year, in an interview with Multi-Housing News, you said that one of the biggest challenges in the multifamily sector is the rising need for low- and moderate-income housing. How has the pandemic impacted this need?
Brooks: The country is experiencing an affordable housing crisis in nearly every city, and the pandemic only accelerates the need for low- and moderate-income housing. Depending on the market, cities are seeing supply constraints and high costs to build. We still see demand for rentals closer to city centers, but there’s a lack of affordable housing, making it harder for the overall workforce to live in cities where their jobs are. We need to think of creative solutions, such as modular, efficient building, to get more units into these markets. In addition to injecting innovation into the industry, we need strong partnerships across industry stakeholders, government, and city and nonprofit organizations, to get the job done.
What can you tell us about housing supply/demand dynamics in workforce housing? What are some of the challenges when it comes to developing and investing in workforce housing?
Brooks: There hasn’t been a lot of workforce housing built over the past several years. Besides cost, cities have to recognize the need to support the rental population both at the low-income and middle-income levels. Zoning laws have been impacting how expensive it is to build rental apartment buildings in major metros, and it’s been challenging to keep up with the growing need for more quality units. The different dimensions and economics around the cost of building those units present a lot of barriers for developers and investors, which can encourage developers to build more expensive condos vs. affordable rental units.
The pandemic might push residents to leave major coastal metros and consider smaller, less dense central U.S. cities. How do you expect this trend to affect the housing market?
Brooks: This trend may take some pressure off the housing market, opening up more available land and helping to make things more affordable. That could flip the script on where developers and investors might build a lot of units over time.
What can you tell us about the current lending environment? What should lenders keep an eye on?
Brooks: There’s a conscious acknowledgment that we’re not out of the woods yet. We see continued smart lending practices and conservative credit structures to help prepare for a changing and uncertain environment. The multifamily space is experiencing increasing activity, and we see opportunities for developers and investors to pick up under-managed or over-leveraged properties at better prices.
When do you expect the economy to bounce back, and how will the recovery unfold?
Brooks: It’s hard to say when we’ll see the economy fully bounce back. According to our head economist for Commercial Banking, Jim Glassman, it will be a choppy return to normal. Businesses are adapting to this changing landscape, but recovery largely depends on the sector. For instance, retail sales and residential real estate are starting to see a bounce back, while other industries like travel still have a way to go until a full recovery. We continue to support our clients during these unprecedented times and help them prepare throughout the cycle. In our view, smart investors do not give way to the cyclicality of commercial real estate—they capitalize on it.