With the COVID-19 outbreak and subsequent stock market plunge, the first quarter of 2019 delivered a shock to the United States as citizens hunkered down at home and companies grappled to adjust and weather it out. While the economic effects will be measured in the months and years to come, many in the apartment sector are looking now at the immediate and projected impacts on rentals.
Multifamily performed extremely well over the past decade, nearly immune to dynamics that impacted other real estate classes. The sector remained strong into the first quarter of this year. Solid fundamentals and demand, as well as short supply in key multifamily categories, continued to carry it through. However, as we wade through these unchartered waters, the big question is: Will rental housing maintain its performance?
Prior to the virus outbreak, experts agreed the real estate cycle was mature. Even as many debated the possibility of a downturn, demand for apartments remained high in part because various groups—college students, workers, singles, couples, families—consistently sought units. Notably, a look over time indicates these target groups are continuously replenished by younger up-and-coming generations. A prime example today is older millennials moving out of apartments to purchase homes and being replaced by younger millennials.
(Bloomberg) — After a bargain on an upscale apartment in the world’s most-expensive property market? Now may be the time.
The spreading coronavirus has crunched rents for luxury homes in Hong Kong as wealthy individuals hesitate to sign leases amid the gloomy economic outlook.
Landlords have cut their asking prices by as much as 20% since mid-March in a high-end area of West Kowloon, according to Arthur Chui, a senior sales manager at Midland Realty. Far fewer international companies are looking for accommodation for their staff from overseas, he said. That used to be another big source of renters in the district.
As the COVID-19 outbreak continues to rock the nation, the multifamily industry continues to grapple with the new reality while reducing risk and disruption for its residents, employees, and businesses. In a period where it’s anything but business as usual, it’s critical that industry stakeholders arm themselves with guidance and resources that will accurately inform important business decisions.
By now, apartment firms’ senior-level crisis teams should be in the throes of putting their COVID-19 response plan to work and adapting it as needed to the ever-changing circumstances. However, many questions continue to surface as apartment firms pick their way through these uncertain times. To assist companies in their efforts, the National Multifamily Housing Council (NMHC) offers this list of suggested apartment owner preparations and ongoing considerations.
The national average rent was $1,468 in February 2020—up 3.2%, or $46, from February 2019, according to data compiled in RENTCafe’s monthly rent report.
February’s year-over-year rent growth matches the pace set in January, but falls just below last year’s 3.5% YOY growth rate. Out of the nation’s largest cities, Manhattan has the most expensive average rent at $4,208 per month, while Wichita, Kan., has the lowest at $655 per month.
While the effects of the COVID-19 pandemic are not yet present in official data, Yardi Matrix’s manager of business intelligence, Doug Ressler, anticipates that impact will manifest in the coming weeks.
“The economy still stands to benefit from ultra-slow rates. Home owners are refinancing while renters are seeing normalized rent growth, which reduces their monthly payments and allows them to spend in other areas,” Ressler says. “We haven’t seen the impact of the COVID-19 pandemic in official data yet, as February employment growth was very strong, jobless claims did not increase, and rent growth continued its steady increase. However, the coming weeks and months will likely come with employment cuts and a slowdown in trade.”
Global financial markets are reeling from the drastic steps governments are taking to fight the novel coronavirus COVID-19 pandemic. During the week of March 9, dramatic drops in the Dow Jones Industrial Average signaled the arrival of a bear market for U.S. equities, and European and Asian stocks have also taken a beating.
In the face of uncertainty, individual and institutional investors are taking a closer look at commercial real estate, with a particular interest in the multifamily sector. Unlike office, industrial, retail and hospitality properties that are directly affected by an economic downturn, multifamily tends to be a more stable asset class.
Because a multifamily property has larger base of tenants than an office or industrial building, an extra vacancy or two has relatively little impact on the overall rent roll or continuing income stream. Also, apartment leases are relatively short term, giving owners the flexibility to adjust rental rates up or down based on economic conditions.
Life insurance companies and their affiliates like to finance and sometimes invest in multifamily projects. To find out about the appeal, challenges, and limitations of the various arrangements, Multifamily Executive caught up with Sean O’Connell of Securian Asset Management, who is affiliated with Minnesota Life and Securian Life. Securian Financial serves as a lender to multifamily owners and does not own any properties, but O’Connell responded to some questions about how the equity investment side works as well.
MFE: Why do life insurance companies invest in multifamily properties?
O’Connell: The multifamily sector is one of four primary sectors that insurance companies target for their commercial mortgage investments. Others being office, industrial, and retail. Historically, the multifamily sector has had minimal defaults. The life insurance industry has long duration liabilities, hence long-term, fixed-rate loans are a good match for these liabilities. Some insurance companies invest in the space as equity investments, both for existing properties or new development.
On March 2nd, HUD relaxed its three-year rule for Section 223(f) refinancing mortgage loan applications.
The three-year rule required that properties be seasoned for three years from certificate of occupancy before being eligible for a HUD 223(f) mortgage loan application. HUD temporarily waived this rule during the recession from 2009 to 2013, but has now permanently changed the rule. Section 223(f) insures mortgage loans for the purchase or refinancing of existing multifamily properties.
We will need to see if HUD’s 2020 multifamily accelerated processing (MAP) guide affirms the approach. In the meantime, the just released Mortgagee Letter states that multifamily real estate investors now have the ability to apply for long-term HUD financing for multifamily properties without having to wait three years for the property to season. Under the relaxed rule, HUD offers borrowers the ability to secure permanent, non-recourse fixed rate debt at low interest rates.
A recent report by CBRE documents the level of foreign investment in U.S. multifamily properties and reveals a 27.3% drop in portfolio deals in 2019. Last year clocked in with a total of over $10 billion as compared with 2018, which was over $14 billion and off the charts.
The firm discounts the fall and instead points at a different and a more positive data point—the numbers for single asset deals as opposed to portfolio transactions. “For single-asset deals—a better measure of investment momentum because of less volatility from year to year—inbound capital increased by 3.8% to $6.1 billion,” per the report.
Most of the incoming money came from the usual suspect, Canada, which accounted for more than half of the inbound multifamily investment volume. Bahrain, Israel, the Netherlands, and the United Kingdom rounded out the top five.
Rental prices for one-bedroom and two-bedroom units fell in March, sliding by 0.4% and 0.3%, respectively, according to Zumper.
It now costs the average renter a median of $1,219 and $1,463 to rent the average one-bedroom and two-bedroom units. This equates to an annual increase of 0.2% and 0.6%, respectively.
Despite this growth, Zumper notes the nation’s top three rental markets including San Francisco, New York, and Boston, all experienced lackluster demand in March.
In San Francisco, renters saw their one-bedroom rental prices drop by 0.6% to $3,500, while two-bedroom rents grew 0.7% to $4,580.
New York renters also experienced some relief this month, as prices for one-bedrooms held steady at $3,320. Meanwhile, two bedrooms fell 1.5% to $3,320.
Rent for one-bedroom units in Boston remained stagnant at $3,000, although prices for two-bedroom units declined by 1.5% to $3,320.
For too long housing affordability has been falsely seen as an industry problem. But in recent years, it’s taken on such an epic scale that local communities and governments are taking more aggressive steps than ever before.
Nearly one-third (31.5%) of all U.S. households are housing cost burdened, spending more than 30% of their income on housing, according to Harvard’s Joint Center for Housing Studies. That’s 37.8 million households who are spending more than they should on housing.
The situation is particularly bad for the rental side of the housing market. While 22.5% of homeowners are cost burdened, 47.4% of renter households are. That renter share rises to almost 60% for those households considered severely cost burdened, paying more than half of their income on housing. And it’s not just the poorest who are struggling; the crisis has spread to the middle class as well.