Multifamily development or housing investments can do many things: diversify the portfolio, reduce portfolio volatility, provide steady income, and offer tax advantages that few investments can match. Historically one of the most popular asset classes, multifamily properties have become a staple for both individual investors as well as institutions. It would appear, then, that the advantages of multifamily investment are clear.
But the current moment — in the wake of the global COVID-19 pandemic and resulting economic depression — demands a closer examination of the intricacies of multifamily rental communities, in order to determine whether this asset class is still as reliable and profitable as it once was.
At Perch Wealth, we believe that investors retain the right to make informed decisions about their finances, and as a reliable partner and thought leader in the alternative investment industry, we want to facilitate your understanding of the current state of the market. In this report, we will explain the potential benefits and risks of multifamily investments through the lens of our current economic climate.
Like essentially everything else, the multifamily housing market was dramatically impacted by the COVID-19 pandemic. As we emerged from the early 2000s, with its booming development and construction of multifamily dwellings, as well as increased interest from investors, the spreading coronavirus brought much of that excitement and initial momentum to an abrupt halt.
Builders, developers, investors, and their partners took a pause to assess the state of the nation. All of us, everyone, needed time to think. What — and where — is the path forward? When we do surface, on the other side of this, what should our plan be?
The Impact of the 2020 Recession
The foundation of the multifamily sector — its basic measure of worth — is its ability to provide access to good, safe, healthy, secure shelter for Americans. The pandemic and resulting shock to the economy threatened this ability. With millions of households’ capacity to pay rent chronically destabilized, the multifamily rental community was shaken. Yet, as it always does, the nature of demand remains.
And so, like it tends to do, multifamily actually weathered the pandemic-motivated recession of 2020 better than the majority of its counterparts; in fact, only industrial held up better. Market deterioration was even far less than in previous recessions.
What’s more is that the pandemic created a new and expanded customer pool. Young adults who had moved home to quarantine with their families are now returning to independent living. Families are now considering more affordable housing options, with many choosing multifamily rental communities, where they can raise their children in a safe place despite the tumultuous economy, which is still regaining its balance.
But as the economy rebounds, the rise in multifamily demand is primed to continue. CBRE forecasts “a return to pre-COVID vacancy levels and a 6% increase in net effective rents next year, with a full market recovery occurring in early 2022.” Jobs could again provide the financial flexibility that individuals need to move out on their own, either from parents’ residences or those of their friends. Yet with the memory of the pandemic’s uncertainty so near, many prospective home buyers may continue to act cautiously, preferring to continue renting for the indefinite future. While 2021 may have started slowly, deals are now coming into the pipeline, competition is fierce, and agency debt is finally easing up.
For multifamily housing investors and developers, then, this signals the dawn of a new day. According to Emerging Trends in Real Estate 2021, a new report released by the Urban Land Institute, the coronavirus pandemic did not generate new trends in the multifamily housing market, but instead sharply accelerated the trends that were already underway. While this acceleration is certainly true, there is also overwhelming evidence that the pandemic did, in fact, inspire new shifts towards suburban locations, preferences for floor plans that support work-from-home options, and integrated outdoor social and recreational areas.
Trends in the Post-Pandemic Multifamily Housing Market
In a post-COVID world, people have become increasingly sensitized to the idea of safety and what a truly safe living space looks like. Because of this, developers need to address consumer demands that extend beyond traditional priorities of location and amenities to include residences optimized for hygiene, health, and well-being. Moreover, owners of multifamily housing communities must be aware of how they can enhance their abilities to manage remotely and with greater flexibility.
Some emerging and established trends include:
- More family/child-friendly housing options in the rental market, as millennials and their families continue to migrate from urban to suburban locations
- A scaled down “community concept,” meaning smaller properties, buildings, or a distinct cluster within a larger neighborhood
- Design that caters to working from home, as the evolving workday and work space are perhaps the most significant long-term impact of the coronavirus
- Flexibility within living units, as spaces for general living must also support and accommodate working, cooking and eating, exercising, and relaxing
- Outdoor open spaces and amenities
- Contactless environments
- Support for new retail shopping experiences, such as secure storage facilities for package delivery
- Access to fresh air through increased operable windows and individual HVAC units
- Common area experiences that support social distancing, featuring wider corridors, one-way circulation, options for separation but not total isolation, evidence of good cleaning and maintenance protocols, more generous common path routes, and more
- Smart home devices that help residents regulate things like thermostats, security, and air quality
There are also some specific strategies that leasing agents and management staff should implement in order to more effectively and efficiently conduct the rental application and signing process remotely.
Recommended methods include:
- Virtual tours, which many agents were doing prior to the pandemic, but which are now seen as virtually universal.
- Curbside documentation, which allows new residents to complete an application and sign appropriate documents in their vehicle.
- Self-guided tours, which provides potential customers to explore the property independently.
One key factor present amongst all of these trends is the growing emphasis on consumer choice and flexibility. As technology drives further transparency about who the consumer is and what he or she wants, investors in multifamily housing developments must continue to remain in tune with the changing profile of the customer.
An Evolving Market Emerges
With investors primed to respond to the demands and needs of the modern consumer base, along with steadily improving market conditions, multifamily investment volume is expected to increase in 2021. CBRE Research predicts U.S. multifamily investment volume will reach about $148 billion next year — lower than 2019’s record level of $191 billion, but a 33% gain over the 2020 estimate of $111 billion.
Now that there is greater clarity surrounding future revenue streams, institutional buyers and value-add investors may become much more active in their purchasing next year. Effective rent growth is continuing to reach all-time highs. Offshore buyers also may increase activity, especially as travel restrictions are eased.
There is also a forecasted continuation of low interest rates over the next year. Favorable mortgage rates are providing further incentive for the potential for increased investment. And the two key multifamily lenders — Freddie Mac and Fannie Mae — have secured sizable capital availability to support increased buying.
Nationwide, the trading of multifamily assets priced $1 million and above increased during the second quarter of 2021, particularly when compared with the previous three-month period. Deal flow from April through June also surpassed the five-year quarterly average, displaying a regained sense of confidence in the multifamily property type.
And as the economy as a whole opens back up, lenders are following suit, with financing available for quality properties. The majority of lenders are actually anticipating larger volume after the slowdown in 2020. More opportunities are available for assets that demonstrated hardiness during the pandemic and/or are now in a strong recovery position. Banks and credit unions are offering competitive lending rates.
What’s more is that Class A and Class B properties are performing well in the market. Most multifamily property managers report collecting between 95% and 100% of rents each month. Rents have also been able to be raised from 6% to 12% on average, depending on the asset. The NMHC collections tracker shows that, in general, upwards of 90% of rents are being collected across all asset classes.
Meanwhile, greater population mobility is assisting with property value in commercial and travel hubs. The urban core is beginning to recover, with increased demand for downtown apartments due to subsiding concerns about the novel coronavirus. As firms bring workers back into the office, the balance between urban and suburban demand is reappearing, with the outlook positive in the urban sectors as people seek out retail and entertainment options. Nevertheless, suburbia has an appeal to be reckoned with, where apartments are often less expensive and offer more square footage, perfect if a potential resident is looking for a unit of an appropriate size for living and working purposes.
As the economy rebounds, as liquidity in the market improves, and as investors become more confident in the state of the nation, the multifamily housing market has the potential to soar to even greater heights.
Our team is happy to sit down and discuss our progressive investment model with motivated investors. Schedule a conversation with any of our expert Perch Wealth team members today, and we’ll work together to craft a long-term investment plan for you that includes potential cash flow, equity growth, and tax benefits.