For the last four years, many multifamily industry pundits prognosticated that the bull run had endured for too long and the end was nigh. Yet, the economy continued to march along, outperforming and outliving nearly everyone’s expectations, and the rental market was solid—that is until COVID-19 hit, a black swan event no one saw coming.
As a large swath of the country continues to self-quarantine in a quasi-state of limbo between the end of the previous cycle and the beginning of the new one, much of the multifamily marketplace including buyers, sellers and lenders have taken pause.
Pricing an asset with so many renters unemployed and a fear that the worst of the recession is yet to come is challenging. Therefore, many apartment investors are circling the wagons, adopting a wait-and-see approach and bracing for a difficult May and June rent collection period.
With a gradual reopening of the country over the coming months, we will need to closely study macro and micro market dynamics to determine how long it will take for the multifamily industry to start revving its powerful engine once again.
A return to normalcy will be driven first by investor demand, followed by a willingness of lenders to loosen their underwriting and decrease their spreads. In the short-term, we will see an uptick in cash offers and seller-carry financing, especially with deals in the under $10 million category, where more are likely to transact.
Where Is the New Normal?
Regardless of the lending situation, buyers must feel comfortable enough to start transacting again at levels that sellers are willing to trade at.
Financial models are currently being recalibrated to adjust for new rent levels, vacancy rates and projected rent growth. Since these key metrics are still being fleshed out, buyers have been erring on the side of caution and compensating for the risk by pricing deals below most sellers’ expectations.
Sellers, for their part, haven’t felt the need to lower pricing much—at least not yet—especially considering industrywide collections for April were at the higher-than-expected rate of 92 percent, just four points below the same period last year. While May is already shaping up to be harder hit, notably for Class B and C assets, the fundamentals of the economy were intact before the pandemic started, giving sellers an impetus to ride it out as long as possible in hopes of a sooner-than-later recovery. Even if rents inevitably drop and vacancies rise, owners will be reluctant to sell at a steep discount, especially if the $5.6 trillion of federal relief efforts has its intended effect.
The pent-up demand and considerable amount of dry powder earmarked for multifamily, along with its resilience compared to most other commercial asset classes, will eventually result in an enthusiastic return of buyer appetite. Wherever prices end up stabilizing, buyers will think they are paying too much, and sellers will think they are receiving too little. When we get to that place, it will feel normal again.
Mark Ventre is senior vice president and Darin Beebower is executive vice president at Stepp Commercial.