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How Can Multifamily Investors Plan for an Uncertain Future?

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The rollercoaster year of economic volatility — and competing forecasts for a post-COVID-19 recovery — have created havoc for business plans for 2020 and beyond.

We spoke with John Loper, an associate professor of real estate at the University of Southern California's Price School of Public Policy and president of Palm Tree Communities Consulting Inc. Drawing on his more than 25 years of real estate development experience, Loper shared insights into how commercial real estate investors and developers can adapt to the changing economic climate.

How can investors and owners of commercial real estate assets plan for an uncertain future?

Loper: In the long-term, such as five years down the road, we'll hopefully have medicines and vaccines and there will be other factors such as demographics that will be more important than COVID-19. In the short term, for the next 6 to 12 or 18 months, we'll have much bigger problems in commercial real estate that will come in a couple of waves. The first wave is when tenants can't pay their rent for apartments, retail and office spaces. The second wave will come when those tenants give up and leave. Re-leasing can be expensive and there may be a capital crunch when building owners need to prepare for new tenants.

The hardest part to plan is for office assets because after 10 years of squeezing as many employees together as possible, workspaces now need to be spread apart. Some companies will need more space. Other companies may keep one-third of their employees working from home permanently and will need less space. Either way, I don't think there will be a dramatic shift in office demand in either direction.

With multifamily, the issue is that if someone doesn't have a job, they can't pay their rent. Lots of young people have moved back home already, just like during the great recession. Some may stay in the suburbs but for the most part I think this is a temporary shift.

What will restructuring for a new normal look like?

Loper: There are many similarities to 9/11 when everyone just went on a pause. There was no new construction, capital improvements were put on hold and everyone just stuck with the basics of how to get tenants to stay and how to get new ones in.

One area where owners may have trouble is if their loan is due and they have to refinance. That's hard to do when your tenants aren't paying, but people with government-insured loans have more of a chance because those lenders are under pressure to make arrangements.

Do you anticipate a mass exodus from urban markets? Where will demand go for apartments?

Loper: I don't expect a mass exodus from the city, but I do think younger workers won't have to work in an urban setting. I think more companies will likely provide satellite offices away from the urban center to allow their workers to avoid public transit and will continue to offer the flexibility of working at home.

We'll see growth in demand for multifamily housing in walkable suburban communities, but there will also still be people who want to live in the city and there will still be offices in those cities where people need to work.

Multifamily and office development in recent years has been pinned to young people in their 20s and 30s who want to live in a city or inner suburbs. I think “little downtowns" that offer an urban feel in the suburbs with walkability will thrive in this new environment so people can get to the amenities they want and to work without using public transportation.

We may see a problem with multifamily vacancy rates and less demand in cities that depend on tourism and conference business, where unemployment is expected to continue at high rates for a long time. But in areas with less supply, such as cities in California or Seattle, we're likely to see rent cooling a bit but no rapid decline.

How do you think multifamily building design may need to change in the future?

Loper: We're already seeing more demand for private outdoor space and that will continue. Renters want a balcony for their apartment or they want a townhouse to rent that has a patio.

This pandemic could have a big impact on the co-living trend, with people rethinking whether or not they want to live with multiple roommates. I expect there to be more demand for microunits because people would rather have their own smaller place than share a two-bedroom with a roommate.

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