The New Un-Normal in Multifamily
Multifamily Finance Absorbing the Impact of COVID, but More Jolts May Be Ahead
Amidst the 2020 economic jolts, the mission to deliver more housing to more Americans remains paramount and more necessary than ever before. As a result, Fannie Mae and Freddie Mac are actively quoting, and lenders are originating and closing deals. To date, the multifamily sector is surprising the industry’s naysayers and continuing to outperform other property types in the face of the economic impacts of the COVID-19 pandemic. Key indicators for multifamily owners, including rent collection and tenant retention, have remained strong, likely supported by the federal stimulus package delivering assistance to individuals and businesses.
However, no sector of commercial real estate has been wholly unscathed by the pandemic-related shutdowns. Looking ahead, multifamily owners and lenders are facing uncertainty as the country begins to climb from record-high unemployment levels1 and a deep recession.
As part of the Mortgage Bankers’ Association (MBA) webinar, “The New Un-Normal in Multifamily,” KeyBank Real Estate Capital’s Janette O’Brien, head of multifamily production, joined Greg Willett, chief economist for RealPage, and Jamie Woodwell, vice president of commercial/multifamily research, MBA, to discuss the state of the multifamily market and how it will be part of the country’s recovery.
Multifamily Data Has Some Bright Spots Amid Turmoil
When stay-at-home orders forced businesses to shut down across the country, the American economy began a precipitous drop. Through the Coronavirus Aid, Relief and Economic Security (CARES) Act more than $2 trillion in relief was distributed, including through enhanced unemployment benefits and direct stimulus payments to households.2 This assistance may have helped sustain multifamily housing through the initial wave of the pandemic. Panelists discussed some key observations from March through May, including:
- Renters are staying put: Apartment retention rates hit a record high in April, at 57.9%.3 This alleviates some of the immediate burden on owners of having to market to new tenants. However, panelists pointed out some of this retention came through short-term extensions, which may mean a dip has been delayed, not avoided.
- Collections have been solid: According to the National Multifamily Housing Council, “Americans are prioritizing rent, and the work apartment firms did to create flexible payment plans is paying dividends.” The agency found that more than 93% of apartment households made a full or partial rent payment by May 27.4
- New leases and effective asking prices are causing concern: New lease signings, which had seen a 45% drop in March, are beginning to recover, and the volume of property website traffic, which had also sustained a big hit, is also starting to rebound. Also troubling is that effective asking rents, or listed prices minus stated discounts, are declining. After month-to-month rent drops occurred in both April and May, effective asking rents are now down on an annual basis for the first time since the middle of 2010, according to RealPage.5
Multifamily Lending Pace Holds Steady
The lending side of the multifamily financing market remains busy, said O’Brien, but new loan requests are showing a slight slowdown. In particular, borrowers should take note if the incredible demand for affordable housing products that preceded the pandemic persists. Affordable and workforce housing as multifamily categories continue to be highly sought-after property types. Overall in May, KeyBank has closed more than 51 multifamily deals for more than $1 billon of value.
Fannie Mae and Freddie Mac are providing substantial liquidity to lenders during the COVID-19 response and supporting borrowers, notes O'Brien. Freddie Mac is increasing volume through its index lock and early-rate lock options, while Fannie Mae announced it will consider additional waivers on reserves for lower-leverage deals.
According to O'Brien, other subsectors of multifamily housing, including student housing and seniors housing, are both experiencing specific pandemic-related challenges, "The door is not completely closed for the right borrower in student housing that has an established relationship with a university, but questions about when and how students will return to living near campuses need to be answered." On the other hand, the agencies are holding on any seniors housing lending, which has borne the greatest brunt from the pandemic due to health concerns about the spread of disease within nursing homes and other senior care facilities.
No Sure Answers Ahead, but Multifamily Still Closing
As the United States comes back from the economic impacts of the COVID-19 pandemic, multifamily professionals are feeling more positive now than they did at the pandemic’s peak. Yet when they look forward, they face many unknowns.
Economists are currently predicting a “swoosh”-shaped recovery, which will take longer than the hoped-for V-shaped recovery.6 Bringing back the jobs lost during this downturn may take years, and future federal programs are unknown. As in previous recessions, renters’ appetite for Class A rent may decrease, and households may double up, further affecting the demand for multifamily and shifting some demand to lower-priced asset classes.
The real estate industry itself is learning how to keep relationships and deal volume robust without key conferences and in-person meetings. In a turbulent environment, having the right financial advisor that can provide strategy and deal execution is more important than ever.
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