A growing number of investors are making deals to buy and sell apartment properties, despite the crisis caused by the coronavirus.
“As 2020 has progressed, we have seen increasing amounts of equity and capital sources focus heavily on multifamily investments,” said Cory Caroline Sams, Senior Director, Greystone Brown Real Estate Advisors. “During the pandemic, the apartment sector has proven to be one of the most stable performing asset classes of commercial real estate while other commercial sectors such as office, hospitality, and retail have not fared as well. Historically low interest rates on commercial loans, as well as investment groups trying to place capital ahead of potential tax reform with a new administration, have strengthen demand and allowed for cap rate compression.”
“The figures have consistently improved,” says Andrew Rybczynski, managing consultant for the CoStar Group, headquartered in Washington, D.C.
With each passing month, apartment investors have treated 2020 a little more like a normal year – though the markets still have a long way to go. Back in May 2020, the total amount investors spent to buy apartment buildings in the U.S. was 75 percent less than they spent in May 2019, according to CoStar. In September 2020, the total they spent was just 45 percent less than the year prior.
That’s nowhere near a full recovery – but it’s a big improvement as a growing number of investors gain enough confidence to buy, according to dealmakers.
“Volumes have re-bounded to pre-COVID velocities and pipelines are very strong with transactions under agreement as well as in the market,” says Matthew Lawton, executive managing director for JLL Capital Markets.
(Relatively) strong performance helps dealmakers
It helps that apartment properties have performed relatively well, despite the pandemic. The vast majority of apartment renters continued to pay rent as summer 2020 stretched into fall, according to data on professionally-managed apartment properties from the National Multifamily Housing Council. Also, the typical apartment community was still close to fully-occupied in the third quarter of 2020, with an average occupancy rate in the 95.0 percent range, according to data firms like Reis, Inc., based in New York City.
“The [apartment] market improved as it became clear, for instance, that many American businesses could still operate with a lot of workers at home,” says Rybczynski. “That, and many other existential questions, have been answered.”
Swift action from the Federal Reserve helped lenders continue to make permanent loans to apartment properties, allowing borrowers to take advantage of historically low interest rates. “Borrowing costs are at all-time lows, and, many times, have more than offset any decline in operations and offset any sort of downward value impact,” says Lawton.
Dealmakers have also figured out how to complete transactions in the new normal. “Property tours during marketing periods have recovered to pre-COVID volumes, and most buyers have fully re-engaged,” says Lawton. Virtual tours have helped, using technologies like Matterport. Some buyers wait until they receive feedback on their initial offers before they travel to see a property in person.
The crisis continued to weigh down the market as the number of coronavirus cases diagnosed began to rise again this fall and federal programs like enhanced unemployment benefits expired. “The amount of uncertainty around COVID-19 treatment, prevention, public reaction, and government response are all working against transaction volume,” says Rybczynski.
Buyers and sellers closed the most deals to trade apartments in places where average occupancy rates and rents have sagged the least since the start of the pandemic.
“Strong population growth regions are seeing strong pricing and offering velocities,” says Lawton. These markets include the Carolinas, Georgia, Florida, Texas, Colorado, Arizona, Seattle, the D.C. metro area and some Midwest markets, says Lawton.
Owners of apartment properties are less eager to sell in overbuilt markets stressed by the pandemic. “Some heavily-hit markets, like San Francisco, saw transaction volumes decline by over 75 percent compared to the first nine months of last year,” says Rybczynski.
Damage downtown, strength in the suburbs
In the most expensive downtown areas of cities like New York or San Francisco, some landlords now offer as much as three months of free rent to tenants who sign leases for luxury units in new apartment towers.
These Class-A apartments “are suffering from an influx of supply which has pushed vacancies up and hurt rent growth in that subsector,” says CoStar’s Rybczynski. “That has made buyers understandably nervous and hurt transaction volume in that subsector more.”
Owners aren’t willing to sell their properties at the lower prices implied by these vacancy rates. “While potential buyers see risk on the horizon, many current owners are not yet feeling the pinch, and so are not coming to market, or willing to accept discounts,” says Rybczynski.
“I don’t hear any concern for the long-term recovery of the urban market,” says Brian McAuliffe, president of CBRE Capital Markets, working in the firm's Chicago office. “The spot values… prices if you had to sell today -- do not recognize the intrinsic value of the asset. Capital partners are feeling the downtown market will be strong in the mid-to-long-term.”