Multifamily Market Expectations: Q&A with the National Association of Realtors

May 05, 2020

The COVID-19 virus and shutdown and its effect on the American economy has caused widespread personal and financial trauma, as well as challenges for every real estate sector. For multifamily owners, concern about their tenants' health and safety is paramount, but naturally there is also concern about the short-term impact from the crisis and the long-term outlook for apartments.

Greystone spoke with Scholastica (Gay) Cororaton, a senior economist and the director of housing and commercial research with the National Association of Realtors, for her insight into what multifamily owners, investors and managers are experiencing now, and her prognosis for the future.

Q. What is the outlook for the multifamily property sector in 2020-21? How is the financial fallout from the economic shutdown expected to impact multifamily owners and managers?

Cororaton: Vacancy rates were exceptionally low during the fourth quarter of 2019 for apartments and prospects were good for a strong year since supply is already tight. We expect demand for rentals to be even stronger because of economic pressure on people for the rest of this year. Demand should be high in 2021, too.

The immediate impact of the virus is a liquidity problem for everyone. Many renters can't pay their rent because of unemployment. Unemployment insurance and the additional $600 federal unemployment boost helps, and for a lot of states that money will make up for lost wages. But in 16 states and the District of Columbia, the funds won't make up the full amount and renters will still struggle. For example, in Alaska, California, Arizona, Florida, Maryland, New York, Connecticut and Virginia, there's a wider gap between wages and unemployment compensation than in other states.

NAR did a flash survey April 19 and 20th that showed that 47% of property managers were able to make accommodations for renters who couldn't pay their April rent. But for smaller multifamily owners and individual landlords, just 24% were able to accommodate renters who can't pay. So that means 76% of smaller multifamily owners may struggle to pay their mortgage if their tenants are unable to make rent payments.

The CARES Act allows mortgage forbearance for up to 90 days for multifamily borrowers, but only if they have federally backed loans. Approximately 47% of multifamily owners have federally backed loans, which means the other 53% would need to talk to their private lenders if they can't pay their loan.

A lot of owners find that working out an arrangement with their tenants, such as having them pay half their rent, makes more sense than a mortgage forbearance for now.

Q. What do you anticipate for the number of sales, sales prices and strength of the multifamily market in 2020-21?

Cororaton: There's plenty of demand for rentals and supply is tight in almost every market, so that will naturally push up rents at some point even if they can't be raised immediately.

Sales prices are still unclear for this year because no one knows how long social distancing will continue and how much more unemployment will occur. It's possible that the economy will stabilize a little during the third quarter, but there will likely be much less buying and selling of multifamily buildings this year. But rents won't shrink at all because there's still limited supply and high demand, particularly in many metro areas in California; Portland, Oregon; Phoenix, Salt Lake City, Austin, Jacksonville, New York City and Oklahoma City.

The people hit hardest with unemployment are those in the retail and hospitality industry with lower household incomes. The homeownership rate is also low in that group at only about 50%, so they are unlikely to leave renting behind anytime soon.

Q. Will credit be available going forward for investors and developers of multifamily properties?

Cororaton: Right now, depository institutions are overextended and constrained by the lack of human resources to keep up with demand. That makes financing from banks tough in the short-term. But the impact of this crisis on financing is expected to be much less severe than the impact of the Great Recession, in part because federally-backed loans make up a larger share of financing at 47% today compared to just 30% in 2006.

The long-term outlook is good. The fundamentals are promising for the multifamily market, so at the end of the day, that's positive for investors.