The past few months have been extremely challenging, not only for the multifamily sector, but for the country as a whole. However, despite the economic difficulties, multifamily real estate opportunities are still considered one of the most recession-proof of the major property types, including office, retail and industrial. Like the other asset classes, multifamily real estate is not immune to its own specific set of challenges during periods of instability and uncertainty. Already, many workers across industries as diverse as food service to oil extraction have experienced job losses or, for hourly workers, reductions in available hours. As a result, some renters have or will find it difficult to pay their rent.
Even with this real threat of disruption in rent cash flow in the short-term, my outlook for investment in this sector is that it will defy any downturn. Multifamily as a whole is much better positioned than most other commercial real estate classes, as well as when compared against many different asset types. As a long-term investment, real estate opportunities offer considerably less volatility than most other investment options. Multifamily, often considered the safest within the sector, is generally more protected against economic downturns.
We also need to separate short-term and long-term disruptions. While in the short-term, the market will see disturbance and upheaval — the full extent of which is not yet known; the long-term outlook is surprisingly unchanged. I’ve long touted not only the growth potential of multifamily real estate, but also the preservation of capital afforded by the asset class.
It is important to note that the multifamily sector itself not be viewed as a single sector that will be affected evenly. There will be winners and losers within the sector, and different locations will present distinct situations.
One question I have been asked on a consistent basis is how will owners meet loan obligations and pay operational expenses in the short-term if rent flow is interrupted? The answer is going to be heavily dependent on the depth of the downturn and the length of this disruption. At best, many millions of Americans have and will find themselves unexpectedly unemployed until the economy once again kicks into gear. Many are renters and many of these renters were depending on their paychecks to make their monthly rental payments. Fiscal stimulus will undoubtedly help, but we’re in unprecedented territory here.
Our business philosophy has long been focused on capital protection, and part of that strategy involves maintaining healthy levels of cash reserves. During this time of uncertainty, we must work to ensure that assets are best positioned to weather the storm, however unpredictable they may be. This includes continuing capital improvement projects on a selective basis to manage cash flow prudently. While we don’t yet know the number of tenants who will prove delinquent in paying rent, owners with similar business plans will generally not have issues with meeting loan obligations. The question then becomes if the significant disruption stretches into the late summer or beyond.
To have a substantial portion of the tenant base unable to make rental payments for an extended period is troublesome for even the strongest operators. To be clear, I don’t think we’re anywhere near this point yet. And, in the unlikely event we do get there, I believe you are going to see what you saw in the last financial crisis. Lenders will work with owners/operators to modify loans to their mutual benefit. Certainly, there will be some less well-positioned owners/operators who will be in trouble much earlier.
While the short-term outlook will see rent collections down and the possibility of values dropping, there is plenty of capital sitting on the sidelines with experienced owners/operators who had been priced out of the market before the outbreak, now ready to invest in any properties in distress.
Overall, I don’t predict any erosion on demand for middle-market residential rental properties or lasting impact on rents in this sector in the long-term. Indeed, while the multifamily market may feel small shifts of instability, people will always need a roof over their heads.