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Economist Expects Muted Summer Ahead for Multifamily Investors

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The first two months after the coronavirus epidemic began to cause devastation for American families and businesses brought some better-than-expected news for multifamily owners and investors. More than 85% of tenants paid their rent in April and May, which, while less than usual, was not nearly as low a percentage as anticipated.

For a longer-term economic outlook for multifamily investors, Greystone spoke with Dr. Peter Linneman, founding principal of Linneman Associates, a real estate advisory firm, and former professor at the Wharton School of Business at the University of Pennsylvania.

Q. What should multifamily investors anticipate for 2020-21?

Linneman: It's hard for any business across the board to do well when all their planning for 2020 was based on an unemployment rate of 3.5%. Here we sit on May 15 with an unemployment rate of almost 15%, which is actually based on lagging data. We went from the lowest unemployment rate in history to nearly the highest unemployment rate in history in a matter of weeks.

That said, among most businesses, multifamily will suffer the least. But don't confuse that with not suffering at all.

On the supply side, there's a bit of pipeline to get through, particularly in the urban core, that will empty into negative demand. That will hurt and take a couple of years to empty.

On the demand side, the good news is that you won't lose a lot of tenants to single-family housing. Homeownership requires confidence, income, and a down payment, and too many people are out of work and have had their savings decimated. But the bad news is that many people won't renew their leases because they don't have a job and prospects don't look good for getting a new job. Multifamily owners also lose senior renters who die or move into senior housing or with their kids. But there's no one to replace them if young people aren't getting jobs.

Typically about 8.5% of leases expire each month and landlords count on replacing those with new people. That's another problem: the Class of 2020 won't be getting jobs right away so they won't be going out to rent an apartment, either. Maybe 10% will get a job, but not 80 or 90%. I think we may see occupancy rates as low as 80% this year and next year. Most multifamily owners are doing pretty well collecting rents and their banks are allowing them to forbear their debt, but they still won't go unscathed.

Q. Are there regional differences for the apartment sector?

Linneman: The urban core markets will feel this worse, at least in the near term because that's where the virus has been worse. We may see some renters move to the suburbs when their leases are up, especially if they feel there's no point in living in the city if you're locked down. So the suburbs will do better in the near term and the cities will do worse, but unfortunately supply is skewed exactly opposite of that.

I don't anticipate any long-distance migration in the short term, though, because the jobs are still primarily located in bigger cities. In the long-term, smaller towns may look more appealing but for now no one can work there.

Q. What is your longer-term economic forecast?

Linneman: I'm an optimist, so I think we'll all adjust to this medically and with our lifestyle. But if we get to the bottom, for example, with 50 million unemployed by July 1st and add 30 million new jobs by July 1, 2021, that would be unprecedented. Yet we would still have 20 million unemployed, which is about a 14% unemployment rate. That's 1.5 times worse than in 2009.

I think it will take two or three years to get back to a good economy. The place we'll see the recovery first is in hospitals. If health care can get back to elective surgery and up to 85% of where it was before the pandemic in a few months, that will go a long way to restart the economy. In normal times, health care is 18% of GDP and once that gets going you start to see more consumer activity.

Q. What will capital markets look like for multifamily investors?

Linneman: Multifamily property is much easier to underwrite because it's more transparent than other property types. You can see real-time occupancy rates and rent payments. Once everyone has six to eight months of results we'll know a lot more and be able to make plans. Right now, everyone is just guessing about what happens next. We don't have any historical context for this at all. Maybe 90% of workers will be back at their jobs in six months, but we don't have any DNA for this.

The baseball commentator Bob Uecker used to say that the way to catch a knuckleball is to wait until it stops rolling and then pick it up. That's real estate investing today. Everyone is likely to wait for a little while to see what happens.

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