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Taking the Long View for Multifamily Investment

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The COVID-19 pandemic and ensuing business shutdown had an immediate impact on every property sector and will continue to reverberate for years to come on people's behavior and the economy. We spoke with Hugh F. Kelly, a special advisor to the Fordham University Real Estate Institute, former professor at New York University's Schack Institute of Real Estate, founder of Hugh F. Kelly Real Estate consulting firm and author of 24-hour Cities: Performance Beyond Promises, about his expectations for commercial real estate in the coming years.

Q: What should multifamily investors anticipate for 2020, 2021 and beyond?

Kelly: I was an early forecaster of a W-shaped recovery with a strong downturn, then a “dead-cat" bounce followed by an extended downturn. It's unlikely that even early 2022 will look the same as the end of 2019. Our economy will be smaller and we won't see the level of jobs come back to fourth quarter 2019 levels until 2023 or 2024. We have a long period where real GDP will be in the 1.5% to 1.6% range.

But for investors, multifamily will hold up well, especially market-rate apartments. In a recession, people have to triage their incomes. A place to live and food on the table come first, which suggests apartments will be even stronger than homeownership.

Q: Are there regional differences for the apartment sector? Any growth areas you anticipate?

Kelly: While I'm in agreement with American urban studies theorist Richard Florida that the things that make 24-hour cities attractive will restart themselves, for the time being, highly dense cities are less attractive to renters. I think well-located, economically supported suburban markets are likely to do well for the next five years or so. An aftereffect of COVID-19 is that high-density markets will be somewhat disfavored and transit-oriented development will be less favored in comparison to auto-oriented metro areas.

Some investors moved into garden apartments in the suburbs in the Sunbelt and the West a few years ago because they saw the opportunities in less pricey areas and saw that as a sustainable investment. That's likely to become even more attractive now.

Q: Are there design changes you expect for future multifamily developments?

Kelly: One of the aftereffects of the work-from-home mandate is that companies are now realizing that this is more economical. But whether people are living alone or living with others, units will need to be larger than they have been in the past, especially to accommodate working at home. The solution to smaller units was to create larger communal amenities, but now people won't want to mingle as much as they did before.

COVID-19 doesn't change everything, but there will be some changes in the way we live because this is a widespread public health issue without a fast solution. I think a reinvention of our economy is needed. Look at the way we lived in the 1920s compared to the 1950s. A new economy and a new lifestyle were invented as the country came out of the great depression and World War II.

Q: What will the capital markets look like for multifamily investors?

Kelly: Despite all of the turmoil in the economy nationally and globally, one thing that's persistent is that there's lots of capital to be placed. Fundamentally, that's part of the explanation for the recovery in the equities market. There's this huge pool of global savings out there.

Real estate is a good place to invest that capital because every financial advisor recommends diversification across asset categories and includes real estate as part of a recommended portfolio. In uncertain times like these, real tangible assets provide a security that paper investments don't. You can underwrite real estate in a way that you can't underwrite a hot stock. Apartments have a good track record that will continue to attract capital.

One reason we see at least 20 times more investment in multifamily housing rather than single-family rental housing is that apartments offer a core proven asset rather than speculation on a niche product. For many large groups of investors who prefer multifamily housing, the return of capital is more significant than their return on capital. A return of 5% or 6% is great when you have track record like apartments that's also a less risky investment.

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