Fluid. That’s the best word to describe the current state of multifamily housing during the Coronavirus pandemic.
As I write this, counties and states are creating their own piecemeal responses to the virus. The economy is taking a hit, and the impact is being felt in every facet of life, including the multifamily sector.
First, let’s not forget how well Dallas-Fort Worth performed just before COVID-19. It added more than 130,000 new residents last year (more than any other in the country), over 112,000 new jobs, and has roughly 740,000 units of apartments (the third-largest market in the country).
Investors started pouring in from markets like New York and Los Angeles, attracted to the robust economic drivers, low cost of entry, and solid multifamily fundamentals. Average sales pricing appreciated almost 140 percent since the beginning of the cycle, outpacing the U.S. norm. And the average cap rates have compressed more than anyone could have imagined (a decade ago we saw cap rates at 7 percent to 8 percent versus 5 percent to 6 percent just before the downturn).
Now, with a bear market at hand, everyone is eyeing rental collections for the next few months, and many are adopting a “wait and see” approach.
With tenants unable to work, owners will collect less rent, and some will inevitably find it difficult to make their debt service payments. This will affect mom-and-pop owners the most, especially those in workforce housing (according to Brookings, the most deficient 20 percent of U.S. households spend more than half of their monthly income on rent).
There is also concern over newer assets. RealPage has seen traffic to multifamily property websites drop by 15 percent. Dallas-Fort Worth has about 30,000 units under construction, so with less demand in the coming months, it’s going to be tough to get that new supply through lease-up.
Nonetheless, there will still be transactions; there will be fewer, and they will take a bit longer, but they won’t stop.
The Agencies will continue to lend (Fannie Mae and Freddie Mac didn’t stop lending even during the Great Recession). Still, they now require lower leverage with less favorable terms (including more reserves for items such as debt service, insurance, and taxes).
There are moratoriums on evictions that will hurt owners (even though they’re morally justified). Still, owners with federally backed mortgages will be able to qualify for forbearance to help preserve cash flow. And we’re helping to get many owners through these difficult times by analyzing their properties, showing them what they’re currently worth, and finding ways to minimize expenses and capitalize on lost income potential.
Lastly, the stimulus – the largest in our nation’s history – will provide needed cash to some of the hardest-hit tenants. The package is granting unemployment benefits to gig and freelance workers who usually don’t get unemployment and includes direct payments up to $1,200 for each adult, which should help many tenants struggling to make rent.
It’s important to note that Dallas-Fort Worth fared better than most other markets in 2008.
Admittedly, unlike 2008, with “shelter in place” and quarantine mandates (that are in effect at the time of this writing), people physically can’t get back to work. But there’s hope that the virus will be less effective in warmer climates like Texas. And Dallas-Fort Worth doesn’t have a dense population, with only 3,645 people per square mile versus 26,403 in New York. The relative lack of population density could ultimately be a positive factor in limiting the spread of COVID-19.
Just before the pandemic, we’ve been adding around 20,000 millennials annually, many of which prefer to rent. And we’ve had several major corporate relocations (Uber, Charles Schwab, McKesson Corp, and the PGA, just to name a few). I’d expect more relocations and a continual influx of new residents once the virus calms down, given our historically strong economic fundamentals and business-friendly policies.
People will always need a place to live, and there are few better places to invest in than multifamily housing, especially in markets like ours. So wash your hands, and let’s get through this together.
Jack Stone is the director of Greysteel.