The COVID-19 virus has upended normal life for most countries in the world, causing significant disruption to many sectors of the global economy, including the financial markets. In the United States alone, more than 36 million Americans lost their jobs, at least temporarily, during the first two months of the pandemic.
We spoke with Lisa Pendergast, the executive director of the CRE Finance Council, about the financing outlook for the multifamily sector in light of the health emergency.
Q. Now that the pandemic has impacted the U.S. economy for more than two months, where do multifamily owners stand? Are most able to continue making their mortgage payments?
Pendergast: The data we've seen from the National Multifamily Housing Council (NMHC) has been pretty positive. A little over 80% of renters paid their rent by May 6th in their survey. Part of that is because the first bill people pay is to put a roof over their heads, so even if they can't make a car payment or their student loan payment, they will pay their rent. Plus, there are several programs focused on helping unemployed renters. We've also seen multifamily owners who have more than one unit use the SBA's Paycheck Protection Plan to pay their employees and to pay some expenses such as property taxes even if not all of their tenants pay. Some apartment owners are setting up desks to help their tenants get access to benefits so they can continue to pay their rent. The April CMBS data showed an increase of 20 to 30 basis points in movement towards pre-delinquency, but we anticipate that to shoot higher around May 15. But this covers all asset classes and we know that hotels and retail have been the hardest hit. We're likely to see more forbearance on loans going forward, but so far multifamily owners are okay.
Q. Are the short-term government policies to address this financial crisis providing adequate support for multifamily owners?
Pendergast: The fact that we have a number of government programs in place such as the PPP and emergency loans has helped, but we've also had tremendously beneficial support for forbearance programs for owners from Fannie Mae, Freddie Mac and Ginnie Mae. The Federal government has been providing wonderful back-up for people.
Q. What advice do you have for multifamily owners who have financial problems due to unpaid rent and rising operations costs?
Pendergast: The best thing anyone can do is to get in front of their loan servicer and have a conversation. You need to provide documentation and show what things looked like January 1 compared to now and be prepared to make your case. If you have cash reserves, your servicer should allow you to use them. There are lots of ways to skin the cat to protect yourself and get relief. If you can refinance now with rates so low, that's another option but it won't be easy to do if you're not thriving. You also need to get skinny on expenses if you can and tighten your belt. This isn't the time to revamp the gym.
Q. Are there regional differences in how well the multifamily market is holding up?
Pendergast: There's not a lot of data yet, but there are some conversations around the difficulty of higher-density cities and how offices and apartments will handle things such as elevators in high-rise buildings. It's possible that so-called 'lesser markets' and garden apartments will be better off than high-rises in high-density cities.
Q. Is credit available now for investors and developers who want to make acquisitions or improve properties? Do you expect liquidity to be available later this year or next year? What is the longer-term outlook for multifamily?
Pendergast: With unemployment so high, funding is down for the short-term. Anything beyond the essentials won't get done. In the long run, buyers are going to expect discounts of 30% to 40% off, but sellers may think a 15% to 20% discount is enough. For now, the owners or borrowers are going to have blink first. But there will be credit available for prudent transactions in the future.
Q. Do you anticipate further headwinds from government regulations — such as an extension of the eviction moratorium or more rent control measures?
Pendergast: I expect we'll see more regulation, just because the nature of this crisis is about the quality of life and the ability of people to have a roof over their heads. But it's important to understand that when you do a no-eviction edict there will be winners and losers. Forbearance for owners can't go on forever and everyone will need to figure out how this will end. Can a lender take the loss? Even if the lender does take the loss, that won't help credit availability for other property owners. The longer this goes on, the greater the likelihood of people losing tenants and this becoming more of a credit crisis. But if we get a reprieve this summer, that could be helpful and maybe then it would be less difficult if another wave hits.