Introduction
The COVID-19 pandemic was a global health crisis that few if any predicted. It caught investors and lenders equally off guard, and most took to the sidelines as they waited to see what sort of short- and long-term impacts it would have on the economy.
The negative impacts to multifamily, it turned out, proved to be short lived. On the contrary, apartments once again demonstrated their resilience in the face of adversity, leading many investors to allocate even great funds to the asset class. Multifamily has shown, yet again, its ability to weather economic downturns.
Here’s a look at the macro-economic factors driving the continued growth of the multifamily market.
1. Housing is a fundamental basic need.
It’s a well-known fact: everyone needs somewhere to live. Those who want and can afford to do so will purchase their own homes. Others will rent apartments. Regardless of whether we are in a bull or a bear market, people still need somewhere to live.
In fact, multifamily has proven to be especially resilient during economic downturns. Those who owned their own homes are often forced to sell, sometimes at a loss and only after having ruined their credit. They are pushed into rental housing, creating enhanced competition for multifamily properties. Renters will often stay for longer than they might otherwise, as they rebuild their credit and save toward the down payment on a house yet again. Similarly, during a downturn, many risk-adverse individuals opt to continue renting rather than embarking on homeownership – a major financial commitment to make during periods of economic uncertainty.
2. New construction starts remain slow.
Recently-released data from the U.S. Commerce Department indicates that the number of houses permitted for new construction but not yet under construction reached a record-high in August of this year. In other words, builders are planning to build new homes—but for several reasons, are not doing so. Materials and labor shortages have been cited as primary reasons for the dearth of new construction.
This lack of new construction has put additional pressure on existing housing inventory. Home prices have skyrocketed. As the gap between apartment rents and mortgage payments remains significant, those on the margin continue to rent. Meanwhile, years of pent-up demand for multifamily has driven apartment rents to new highs. In some markets, apartment rents have skyrocketed more than 20 percent year-over-year as people compete for increasingly hard to find housing.
3. Favorable loan terms make multifamily attractive to investors.
Multifamily already benefits from incredibly attractive financing available through banks, debt funds, life insurance companies and Fannie Mae and Freddie Mac, two government sponsored entities. The broad based availability of debt capital to multifamily, especially through the agencies, gives apartments an edge even over other thriving asset types such as industrial.
4. During periods of economic crisis, the federal government has shown a willingness to step in.
Because housing is a critical piece of the nation’s infrastructure, the federal government has a vested interest in ensuring its stability. When the pandemic hit, Congress moved quickly to pass the CARES Act. As part of this legislation, anyone with a Fannie/Freddie loan was given a forbearance period. Loans could be deferred for up to one year while landlords worked to stabilize rent collections.
Meanwhile, the CARES Act offered millions of Americans enhanced unemployment benefits and stimulus checks. This support was used to offset any potential loss of earnings caused by the pandemic. Many put this additional income toward their rent payments, resulting in far fewer rent defaults than experts originally anticipated.
Conclusion
To be sure, the commercial real estate industry as a whole was not unscathed by the pandemic. Office, retail and hospitality were particularly impacted. Multifamily, however, has proved to be especially resilient. Aside from a brief dip in rent collections and short-lived uptick in vacancies, multifamily has weathered this latest economic crisis far better than most expected. It is among the many reasons why we believe apartment buildings will continue to be a valuable addition to any investor’s portfolio.
