While unemployment claims are declining from their March high, there is little good news surrounding employment, as one-quarter of our country’s workforce is unemployed. The CARES Act currently provides an additional $600 a week in unemployment benefits on top of the standard state payment, but this is set to expire at the end of July unless another stimulus bill is passed. The HEROES Act was passed by the House of Representatives on May 15 and proposes to extend the extra unemployment benefits through January 2021, among other provisions. The $3 trillion HEROES Act will likely face significant opposition in the Senate. The extra $600 a week is a necessity for many Americans to pay their bills, most notably rent, and if it does run out, we could see rent collections decline rapidly for the rest of 2020.
Due to a shortage of Class B and C apartments industry experts are predicting a slight to moderate increase in overall national apartment vacancy rates for 2020. With workforce housing vacancy at its lowest level in 20 years, prospective renters are facing difficulty finding an available unit to occupy. According to a recent Marcus & Millichap report, during the past three years, Class B vacancy has dropped 0.70% to the low-4% range, while the Class C rate has retreated 1.30% to the mid-3% range. Although construction will help provide some alleviation, the predominantly Class A deliveries will not completely align with some renters desired price point and location of demand. Class A apartments were expected to benefit from strong demand as sustainable white-collar job creation was expected to keep vacancy rates low despite a 2020 delivery of roughly 300,000 new apartments. However, since the relative halt in new construction lending, those once solid projections are on hold for now.
Though many markets are witnessing a revival of their major metros the broader housing trends now favor suburban areas. With millennials entering their 30s, they are navigating significant lifestyle changes such as marriage and creating families. According to a recent CBRE study, during the past five years, the nationwide urban vacancy rate has decreased 20 basis points to 3.6 percent, while the suburban reading has dropped 100 basis points to 3.5 percent. Buying or building in the suburbs will remain the best bet based on market performance and investment returns. It’s being predicted by industry leaders, suburban multifamily will outperform urban, maintaining lower vacancy and achieving higher rent growth.
The idea of a multifamily value add opportunity is becoming scarce, and in most cases unrealistic. Unsurprisingly, due to the current pandemic, over the next couple of quarters the overall market sentiment for success in multifamily value-add investing will not be through renovations, but by maintaining above average occupancy levels and the lowering of expenses. Additionally, pricing on value add properties are nearing replacement cost as the influx of global capital chasing yield continues to pour into the value add space. It is not unusual to see deals where a seller has renovated only 20% of the units but has priced the asset as if the entire property has already been repositioned and it sells.
Most multifamily investors are projecting flat to negative rent growth throughout the remainder of 2020. As national rent growth continues to soften, it is unlikely we will see substantial gains typical of leasing season for at least the next several months. Markets that have been some of the slowest to reopen following the lockdowns are seeing the sharpest declines in YoY rents. Now, the play is operations, with specific attention towards tenant retention. Renewal growth activity is the new normal as owner-operators assume defensive posturing against future market slowdowns instead of new leasing.
Lending volume is far from what it would ordinarily be at this point in the year. National mandates and economic disruption have upset lending expectations, just as the multifamily industry enters its traditional peak leasing season. With interest rates continuing to bounce along at historical lows, some onlookers predict that banks will favor multifamily refinancing transactions on stabilized properties, but completing those transactions has proven difficult, too, in light of uncertainty surrounding rent collections and vacancies. What’s more, some jurisdictions have deemed appraisers and inspectors to be nonessential workers, making it difficult for lenders to perform proper due diligence. Finally, eviction moratoriums and mortgage forbearance programs are further complicating the picture as lenders scramble to balance social and economic responsibilities.
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