The past several years have been marked by an increase in average rent prices in many major U.S. cities, a lack of affordable multifamily housing, and a tight rental market. The pandemic and potential recession that may result isn’t likely to lead to more affordable housing, but it could lead to opportunities for some investors ready to cash in on properties in secondary markets.
Here are 3 ways that the multifamily housing market might be impacted by the pandemic.
1. House Foreclosures Could Lead to More Rental Demand
For the immediate future, tenants may be stuck in place, unable to move either due to logistical or economic reasons. Some multifamily buildings are prohibiting new residents, while others only permit remote showings, which can make it harder for prospective tenants to make a decision.
A report from Attom Data Solutions showed nationwide foreclosure lows in February 2020. However, Chief Product Officer Todd Teta predicts a rise in foreclosures once courts lift the ban on foreclosures and evictions. This could lead to more people seeking apartments, which could create a market ripe for landlords.
Much depends on what happens once the country re-opens—and when that phased reopening occurs.
“We want states to open up at a safe pace, but obviously, as the economic situation gets worse, that will impact the opportunities available in the market,” says Brant Brown, COO and CFO of Westmount Realty Capital, a commercial real estate investment and development firm in Dallas. “We’re looking at what the unemployment story is going to be, what collections are going to be, and how quickly the states re-open.”
2. Tighter Lending Restrictions Will Force Investors Not to Over-Leverage
The NMHC report spotlights tighter lending restrictions, showing the Equity Financing Index dropping from 61 to 13, and the Debt Financing Index plummeting from 68 to 20.
According to the report’s statistics, 75% of respondents said that equity financing was less available than in the three months prior; 71% of respondents said debt financing conditions were less favorable.
Especially now, Brown advises investors to avoid over-leveraging property or not leaving enough cash in the bank for repairs and emergency expenses, which could include tenants not paying rent due to job loss.
“A lot of multifamily operators have been running their properties cash-poor. In times like this, it really catches up with them,” Brown says.
In spite of low interest rates, underwriters will be looking to make sure investors have sufficient capital to manage the property.
3. Investors could find opportunities in suburban markets.
The second month of the pandemic in the U.S. found many city-dwellers temporarily fleeing their apartments for more space and a change of scenery.
“The fundamental story of [urban] markets is attractive, so I wouldn’t place bets on what the long term [impact] will be,” Brown says. “In the short run, a lot of people are very concerned about [the spread of the virus], and they’re going to vote with their feet.”
Cities may become less desirable places to live as the risk of infection continues to weigh on communities and remote work has people spending more time at home. Residents may seek larger apartments with more amenities in less populated areas, says Brown. “Wherever they move, it probably won’t be those city centers.”