How Multifamily’s Defensive Nature Holds Investor Interest

Despite a challenging economic climate, this asset class remains liquid and relatively robust, notes JLL's Matthew Lawton.
Matthew Lawton

Volatility in the capital markets and economic uncertainty are putting defensive sectors such as multifamily in investors’ favor.

Multifamily has grown to become the most liquid asset class in the U.S., accounting for 32.0 percent of overall transaction volume in the first quarter of 2020. Throughout the first 90 days of the coronavirus pandemic, multifamily—along with industrial—upheld its position as the most liquid property sector, in terms of investor interest. The sector’s resiliency is also illustrated by prolonged outperformance and durability since the onset of the virus. In the majority of markets, rent collections are robust and occupancies are stable. These factors, combined with the low cost of liquidity the government sponsored enterprises are providing, separate the asset class from the pack.

Despite the economic slowdown resulting from the stay-at-home mandates to contain the spread of the coronavirus, multifamily rent collections continued to exceed expectations through April, May and June. In fact, the share of occupied units for which rents were collected marked a slight uptick in June—concurrently with the rebound in economic activity—while occupancies declined slightly, evidencing the sector’s robust performance to date.

Nationally, June rent collections for Class A assets reached 95.3 percent, Class B buildings held strong at 93.2 percent, and Class C—largely representing workforce housing assets—minimally declined to 89.9 percent on a month-over-month basis. Secondary markets with affordable housing or a robust technology and innovation sector, such as San Jose, Austin, Dallas-Fort Worth, and North and South Carolina, continued to outperform.

Underperforming markets continue to be high-cost gateways and tourism-driven hubs—such as Los Angeles, New York, San Francisco, Orlando, and Las Vegas, however, Class A collections have improved marginally month-over-month for such cities. Rent collections will continue to be a key metric tracked by investors in the coming months, as federal stimulus plans such as the Payroll Protection Program, are due to expire at the end of July.

Some Improvement in Conditions

Over the past month, occupancy rates have stabilized, and even posted slight gains, across multifamily asset classes; Class B and Class C product continue to benefit from relative affordability. Concurrently, concession packages have expanded across market types and asset classes, as managers seek to attract and retain tenants. Urban multifamily operators have bolstered offers in a more pronounced way than their suburban counterparts. Axiometrics reports that concessions for assets in urban areas accounted for 1.7 percent of monthly rent in May and 1.0 percent of monthly rent in suburban areas.

Given the balanced leasing fundamentals and remarkably stable rent collections seen since mid-March, investor confidence has resurfaced, and, as such, investors are eager to place capital in the marketplace and gain first-mover advantages. In previous downturns, during the transaction volume trough and slowing delivery schedules, investors who acquired multifamily assets ahead of rent increases were rewarded with outsized income growth. Elevated net-effective rent growth, coupled with diminishing concession packages, illustrate the upside potential coming out of a slowdown.

From a capital markets standpoint, transaction pipelines are increasing, and investors are demonstrating renewed confidence and pent-up demand stemming from the relatively stable leasing conditions. Concurrently, over the past 30 days, institutional owners have increasingly requested asset valuations, seeking pricing discovery that is resulting in a wave of assets coming to the market over the next 30 to 45 days.

The multifamily sector is poised to remain strong and resilient as economic activity reawakens, given the sector’s defensive characteristics, relatively low capital expenditure requirements—compared to office, retail and hotels—and the weight of liquidity targeting the sector.

Matthew Lawton is an executive managing director with JLL Capital Markets.