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Recently I was asked, "What if I invested in real estate during the pandemic"? With rent moratoriums and the grim news cycle exposing the complications surrounding real estate, in reality, it is that it was just another season in real estate. It has affected everyone differently, from lenders to brokers and everyone in the middle, including the tenants and homeowners. And as we move towards a post-pandemic time the numbers will speak for themselves.
To better understand Multifamily Investing, let's consider the size of the market and who its major investors are.
Per the MBA- Mortgage Bankers Association MBA.ORG The total commercial multifamily lending is forecast to rise to $409 billion in 2021 - a new record and a 13 percent increase from last year's total of $360 billion. MBA anticipates additional increases in lending volumes in 2022, with activity rising to $421 billion in total multifamily lending.
Here are quarterly sales of Commercial Multifamily
Who Owns the most debt financing for Multifamily? Clearly, the banks are involved as they originate loans. But it is interesting to see who else participates in real estate.
Multifamily Mortgage Debt Outstanding
The four largest investor groups are: banks and thrifts; federal agency and government-sponsored enterprise (GSE) portfolios and mortgage-backed securities (MBS); life insurance companies; and commercial mortgage-backed securities (CMBS), collateralized debt obligation (CDO) and other asset-backed securities (ABS) issues.
Looking at multifamily mortgages in the first quarter of 2021, agency and GSE portfolios and MBS hold the largest share of total multifamily debt outstanding at $861 billion (50 percent), followed by banks and thrifts with $481 billion (28 percent), life insurance companies with $171 billion (10 percent), state and local government with $106 billion (6 percent), and CMBS, CDO and other ABS issues holding $53 billion (3 percent). Nonfarm non-corporate businesses hold $19 billion (1 percent).
Single-family vs Multifamily delinquencies from a historic perspective.
The pandemic certainly had an impact, but nothing like that of the 2009 downturn, however. Single-family housing saw much more pressure for delinquencies than Multifamily. A professionally managed Multifamily complex with hundreds of tenants has the size or scale that buffers the impact from rent issues. When you have 85% + occupancy, or rent stabilization, the rental income providing strong revenue. With a single-family tenant if there are challenges there is no other income. To further lower overall risk the Asset class can also be considered to determine what market to invest in. Low-income housing vs Class A or Class B will have different levels of risk.
To examine what happened with rents as well as vacancies the below graphs show that rents were up and vacancies were stable throughout the pandemic and certainly faired better than the office and retail space. Since January 2021, the national median rent has increased by a staggering 13.8 percent. The sunbelt and other desirable locations have seen even greater increases caused by strong demand.
So how does Multifamily remain stable during a downturn?
From personal experience, the pandemic and the rental moratorium did cause rent challenges, but we continued to receive 99.4% of my rents and still had a strong year. As we start to push out of the pandemic, we are seeing demand spike and rents increasing. We have had zero vacancies.
A recent Forbes article titled Multifamily Investments Weather Economic Winds
During times of crisis or economic downturn, Multifamily has consistently proven its resiliency, stability, and predictability. The Covid-19 strain, like other economic challenges, has shown that Multifamily remains consistent. The reason is simple: People always need a place to live. In downturns or crises, people are forced to focus on their most basic needs. When money gets tight, you cannot get much more essential than food and shelter. Although some renters will seek more affordable options, most will settle in for the storm. Every single time, rents in commercial apartment properties have remained stable, including our current crisis.
The success of other commercial real estate asset types is tied closely to the business environment and economy, not people and their lifestyles. The direct driver for office investment returns is job growth, a function of the economy's health, inflation, and interest rates. The health of the industrial segment is driven by overseas competition, tariffs, and GDP. Retail is subject to online shopping. For Multifamily, none of the above is a direct influence.
From 2003-2008, there was minimal rent growth in the apartment sector, and capital was so available that people were increasingly buying homes rather than renting. When the Great Recession occurred, and many homeowners became renters again. Even during the rent-stagnant years before this crash, apartment rents never went backward; they just grew at a slower rate leading up to the crash. Apartments as an investment type then led the way out of the crisis and entered 10 years of unprecedented rent growth.
"Multifamily… is more protected against downturns than any other asset class, making it a safe investment as the cycle matures." – GlobeSt. December 31, 2019
Economic hardship and recessionary times come and go, but they can inflict long-lasting damage to investment portfolios and cause overwhelming emotional stress to affected investors. However, for those armed with information, real long-term investment opportunities are there. For decades, people have invested in apartments for tax-advantaged passive income, equity growth, diversification, and stability.
The Answer Remains consistent
Although the pandemic did cause rent challenges, professionally managed businesses weathered through, and today the Rents are at all-time highs. Of course, no investment is entirely recession-proof, but multifamily apartments are recession-resistant. Historically, an investment in basic needs (like shelter) has weathered the economic storms better than other investment types.
Multifamily investing generates income through the use of leverage as well as from rents. With a relatively small amount of money, at a low interest rate, a large asset can be controlled. When you examine multifamily real estate's performance during previous recessions, the evidence is overwhelming. The inherent return components of current income growth, compelling risk-adjusted returns, and lower volatility can provide overall solid performance in good times and bad. For Investors, the pandemic did not slow the consistent returns and strong exits. If anything it has exposed the mismatch in supply and demand.
To illustrate the resilience of Multifamily investing. Here is a current headline that captures it well-
Renters face a 'landlord's market' by Gianna Prudente
As the housing affordability crisis pushes more first-time homebuyers into the rental market, rent prices are soaring month-over-month across all of the country's 100 largest metro areas.