October 29, 2020
If you’ve been eying a short-term value add multifamily project, you might want to put that on the back burner for now. In the current climate, multifamily is still a very strong choice for long-term holds but far less certain for short-term holds.
Changes in Multifamily Fundamentals
Volatility is high in multifamily markets around the U.S. Many of the fundamentals that play into multifamily have been touched by the ups and downs of the market in 2020. Luckily for multifamily owners or prospective owners, this asset class has faired better than expected and has managed to get back to a healthy place.
Let’s take a look at some of the things that have impacted multifamily and how the asset class has managed to remain strong.
Job loss has always closely tied into the fundamental drivers of multifamily. When people experience job loss, they have a difficult time paying basic living expenses, including rent. With more than 12 million people classified as unemployed in September 2020 and a 7.9% unemployment rate, some disruption to the multifamily market is inevitable.
However, job loss has not had as significant of an impact on multifamily as it was expected to. So far, multifamily and industrial are the strongest real estate sectors in 2020, with steady numbers and even continued growth in some parts of the country.
Certain subsections of multifamily housing are in a better position than others. Middle-income multifamily is better off than luxury apartments, with demand holding fairly steady nationally. Low-income housing is also performing well, though not as well as middle-income housing.
Construction of new multifamily units was high coming into 2019, leading many to believe the market would be oversupplied in 2020. However, with many new constructions halted or put on hold, the problem of oversupply has lessened and absorption rates have evened out.
Demand has held fairly steady for multifamily in the U.S. Although there were significant dips during early 2020, it has recovered enough to absorb most of the new multifamily properties getting introduced into the market, accounting for the slower rate of new introductions.
In 2020, rental rates across the U.S. began to decline. A report from the National Association of Realtors showed that rental rates in September 2020 were lower year-over-year in 36 of the 100 largest metros in the country.
Reduction in rental rates across the country could affect the NOI for many properties. The markets seeing the sharpest declines are tech hubs and traditionally closed-off markets, such as San Francisco, Washington DC, or New York. As people begin working from home more regularly and become more location-independent, they are seeking out homes in less crowded spaces near beautiful areas. Markets like Tampa, Baltimore, and the Bronx saw surprisingly high rent increases.
There is a large disparity in the U.S. rental markets in 2020. While many of the traditionally strong markets are seeing reduced rates, there are others that are seeing unprecedented growth.
The Future of Multifamily
Multifamily is still a solid investment in much of the country, with some areas being particularly well-poised for explosive growth. Markets that were already experiencing growth because of the quality of life or general desirability of the area are even more likely to see exaggerated growth in rental markets.
However, there are other factors at play that continue to affect the multifamily market at large, especially those factors related to the Coronavirus pandemic.
Throughout much of the U.S, especially in larger urban areas, there are eviction moratoriums that prevent tenants from being evicted due to failure to pay through at least the end of 2020. Some of these moratoriums might be extended.
Eviction moratoriums help protect tenants from eviction during situations like the ongoing pandemic. Many landlords are working with tenants to make arrangements that help ease the burden of missed rental payments. Banks are also offering some mortgage relief options to keep landlords in good standing on their mortgages for multifamily properties.
As the real estate market takes some hits, multifamily remains in a strong position throughout most of the country. Most experts agree that as a short-term investment, multifamily is not a good option, but that these property types are still a solid long-term investment.
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