Will Coronavirus Create Multifamily Investment Opportunities?

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.

A report from the Washington, D.C.-based National Multifamily Housing Council showed a loosening market in April 2020 as a direct result of the coronavirus pandemic. Tracking trends from the past nine months, NMHC's Market Tightness Index registered a rating of 12 in April, indicating a very weak market. The score is a sharp decrease from 60 in July 2019, down to 54 in October 2019, and dropping slightly to 48 in January of this year.

In the report, NMHC Chief Economist Mark Obrinsky explained: “In the market for apartment sales, many respondents appear to have adopted the 'wait-and-see' attitude, noting that COVID-19 has created too much uncertainty around asset pricing for much of any transactions to occur."

And, while some buyers are scouring for deals, few sellers are willing to adjust prices downward. "Only 1% of respondents reported higher sales volume, the lowest on record since 2008," added Obrinsky.

So, how long is the drop expected to last, and what trends will we see in the next six to 12 months as the country begins to reopen, slowly and safely? Most importantly, what can smart investors do to position themselves for success as demand for multifamily housing begins to increase again?

Here are 6 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. Growing Multifamily Investment Opportunities

Multifamily investors may find opportunities in secondary markets and in luxury multifamily, says Brown. “The C market is taking a little bit of a beating," he says. “In the next six months, we may see a lot of what I call 'broken opportunities.' With the way local jurisdictions are putting a stop on all evictions for now, landlords could be in a tough position come summer and fall, especially on C products."

Brown says investors might find more “broken" real estate, where the fundamentals of the deal just don't make sense, in C markets. “More than likely, a seller isn't going to discount it enough where it pays for you to buy it."

Savvy investors may keep their eyes open for stressed sellers—perhaps facing foreclosure—looking to off-load a property that's in good shape. “Those may be few and far between," Brown says.

Sale listings are at the lowest monthly total since 2010, according to CoStar data. Only $4.4 billion in apartments traded hands in April.

“Deal volume hadn't fallen below $5 billion in a month since 2014,” said John Affleck, vice president of market analytics for CoStar. “That's perhaps not so surprising; what may be more surprising is that deals are happening at all, given the uncertainty around demand for rentals.”

Brown points to a third category that could be a sweet spot for post-coronavirus investors. “You'll find quality real estate where the seller is not in a position where they have to sell. You may not see a significant discount, but it's an attractive piece of real estate you'd want to own for a significant amount of time."

If sellers refuse to budge on price, however, we could be looking at a loose rental market for quite some time.

3. 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.

4. 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."

5. Tighter Income Qualifications Could Create Safer Investments

Smart investors, for their part, will seek residents with better income qualifications, Brown says. Having that margin can help hedge against a prolonged recession, or another country-wide shut-down due to a re-infection of COVID-19.

Areas like North Texas and Phoenix, where Westmount invests, may return to the conventional 3:1 income-to-rent ratio, Brown surmises. Densely populated cities like New York and San Francisco, where rents are higher than average, may simply tighten restrictions. “There will be a shift to having residents with better income qualifications."

6. Market Correction Could Expand Opportunities for Investors Who Go Back to Basics

As the country reopens and the multifamily rental market sorts itself out, the loose market could look more like a market correction than a crash. As in any market, Brown advises investors to go back to basics and ask:

• What's the property's location?
• What's the property's story?
• What's the unemployment situation in the area?
• What occupancy has the property achieved during bad times?

With these fundamentals in mind, he says investors can make the right choices even with so much uncertainty in the future.

“Intelligent sources are saying the fourth quarter is when we will start to rebound," Brown says. “If that happens, fingers [are] crossed that it's set up well for another seven-year expansion. We're seeing the correction happen now, and we have to navigate it."