When it comes to surviving the devastating effects of the COVID-19 pandemic and subsequent economic damage it did, multi-family housing was one of the sectors of commercial real estate that fared better, second only to the industrial sector.
However, that’s not to say that it wasn’t hard hit. Investors lost significant amounts of rental and ancillary income due to waived fees, rent deferment and delinquencies. Urban multi-family was hit the hardest, considering that without amenities such as night life, restaurants, cultural attractions and other entertainment were no longer available due to the pandemic.
As leases expire, tenants are moving further out of urban centers to save money, especially since their reasons for living in urban areas are no longer available. Factor in the riots and demonstrations that occurred in city centers of Portland and Seattle, and the desire to move to urban centers lessens even more. For these reasons, recovery in urban centers will lag behind that of multi-family properties in suburban locations.
According to CBRE, experts predict that there will be a return to pre-COVID vacancy rates and a 6% increase in net effective rents in 2021. However, 2021 will be starting with the same problems as 2020. Yet, as the vaccine rollout progresses, so too should the multi-family sector improve, and CBRE predicts a full market recovery by 2022.
According to Lee Kiser of Forbes Magazine, urban centers should begin to revitalize by last quarter of 2021, and amenities will return. If so, the desire of tenants to rent in urban areas should also increase. In fact, Kiser predicts that the demand to return to normal will be so strong that it will eventually result in rent increases.
One factor deeply affecting the recuperation of the multi-family sector is the loss of collections, and how quickly renters will be able to return to regular payments. The stimulus plays a huge part in this, which is why the US Government is so tightly intertwined with the recovery of the commercial real estate industry, particularly in the multi-family sector. While the initial stimulus helped property owners and renters somewhat, the lack of injection of aid over the late summer and fall has had a negative effect on recovery efforts. An additional stimulus, combined with a federal plan for the pandemic will most likely increase investor confidence that there is an end in sight.
This will hopefully also impact lenders and provide them with the confidence needed to loosen their grip on financing. Their logical reaction to the pandemic and recession was to get hyper conservative on lending, even to the point of basing their financing decisions not on appraised value of a property, but on the worst-case scenario of tenant loss. Hopefully, once the pandemic trends towards being under control due to a concerted federal effort, along with economic boosts from the government, lenders will feel more secure in getting back to normal lending practices.
What are your predictions for 2021 in the multi-family sector? Leave your comments below!