COVID-19 has caused chaos in many real estate segments in 2020. Although the multi family real estate sector is known to be a resilient one, it’s not immune to the wrath of this pandemic. Prior to the coronavirus, multi family markets in the US enjoyed almost a decade of improvements and investment flows. Relative to other property types, multi family homes may be better positioned to weather a real estate downturn. However, many renters are now dealing with mass layoffs and furloughs. And as renters’ incomes decline or disappear, this affects multi family properties’ rental revenue, operating metrics, and overall valuation. Real estate trends are starting to show that the multi family real estate market is going to experience massive changes. Here’s how the COVID-19 pandemic is affecting multi family homes in the US real estate market 2020.
Related: A Coronavirus Recession and Its Potential Impact on Real Estate
Impact on Multi Family Home Construction
Before the coronavirus pandemic and the stay-at-home orders, US multi family permit volumes were at their highest since 2015, and construction starts had hit a 34-year high in January of 2020. However, the multi family sector was already seeing a decline in both permits and starts according to a new report by RealPage. According to seasonally adjusted data from the US Census Bureau, a total of 522,000 multi family units were approved for construction in January, and work was underway on an additional 547,000 units. However, permits fell to 415,000 units in February. This is a decline of over 20% compared to January and 5% compared to February 2019. Chuck Ehmann, real estate economist and author of the RealPage report, said:
“Permits will likely continue to decrease gradually in the coming months due to the effects of COVID-19. Developers may wait to start construction projects given economic uncertainty and government actions to slow the spread of the virus”
Regardless of this, he also added that many local governments have considered construction an essential business and exempted workers from shelter-in-place mandates. In February, US multi family construction starts were down 17% compared to the previous month. However, compared to 2019 and year-over-year data, construction starts were still significantly higher with an increase of 44%. Meaning, the US multi family real estate construction pipeline got off to a solid start this year. Experts believe that the COVID-19 pandemic is unlikely to end construction in 2020. When shelter-in-place restrictions are lifted, it’s likely that construction starts will pick up.
Impact on Average Multi Family Rents
In addition to the slowdown in permits and construction, average rents of multi family real estate are expected to see declines as well. This is due to the US economy grinding to a halt as millions of workers have lost their jobs, been furloughed, or have been asked to stay home to lessen the effect of the coronavirus. According to a report by Apartment List, the pandemic didn’t have a significant effect on rent growth in March. However, it’s likely that the volume of moves will slow significantly in the coming months as a result of the shelter-in-place orders, eviction moratoriums, and general uncertainty. Chris Salviati, the housing economist at Apartment List, wrote:
“While this decline in mobility has probably already begun in recent weeks, we have not yet seen properties adjust their rents in response…A dip in demand would normally cause property owners to start setting lower prices, but given the temporary and uncertain nature of the present situation, properties could be holding out on changing rents until things have settled down.”
According to RealPage’s report, falling rents are especially remarkable for luxury apartments (class-A properties) which usually see larger rent gains than other types of multi family real estate rentals in the spring. The least expensive class-C properties are also especially threatened by the coronavirus pandemic. This is because job losses are hurting their vulnerable residents who don’t have a financial cushion. According to Greg Willett, chief economist for RealPage, “Middle-market properties should fare better than the two extremes of the product spectrum”. So if you’re looking for multi family homes for sale, we suggest focusing your search on class-B properties as they are the best rental properties to invest in now.
Related: Everything You Need to Know About Property Classes
Impact of CARES Act on Multi Family Real Estate Owners
As the impact of COVID-19 becomes clearer, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law on March 27th. Language contained in the $2 trillion emergency stimulus package and guidance from the National Multifamily Housing Council encourage owners to practice extraordinary tenant-friendly forgiveness of late and non-payment of rent. Multi family real estate investors are now asking: how is this going to affect my real estate business in 2020? While some may think it’ll have a negative impact, there are some clear benefits of the CARES Act to real estate investors and landlords of multi family homes and apartments to take advantage of.
First off, the coronavirus stimulus will provide much provide needed cash to some of the hardest-hit tenants in the US. The package is granting unemployment benefits even to freelance workers who usually don’t get unemployment benefits. It includes direct payments up to $1,200 for each adult – this should help many tenants struggling to make rent. Moreover, while many states (like California, New York, Texas, and Illinois) have enacted laws placing a moratorium on evictions, owners of multi family homes with federally backed mortgages can qualify for forbearance to help maintain their rental property cash flow.
On March 23rd, the Federal Housing Finance Agency announced a loan payment deferment plan for multi family borrowers facing revenue losses caused by the coronavirus. The FHFA stated it will offer mortgage forbearance for multi family property owners with a condition that they suspend evictions for renters who can’t pay rent due to the effect of the coronavirus. The forbearance is available to all multi family properties. If you’re in multi family real estate investing, hold a Freddie Mac and Fannie Mae loan, and facing hardship as a consequence of the pandemic, you are eligible to take advantage of this program.
Related: COVID-19: Mortgage Relief Programs for Real Estate Investors
Silver Lining for Multi Family Real Estate Investors
Despite the many challenges, there are some positive signs that support the ongoing resilience of the multi family real estate market during this health crisis. In spite of the future unknowns of the COVID-19 pandemic, here’s why many housing experts are optimistic about the outlook for multi-family investing:
- Multi family homes are long term real estate investments and will only be affected in the short term by the real estate slowdown caused by the coronavirus
- In response to the pandemic, interest rates are at an all-time low. Low interest rates create the perfect recipe for maximizing your return on investment
- Tenant turnover is expected to decrease dramatically, reducing the operating and capital costs of finding and securing new tenants
- As remote work will remain in a post-coronavirus world, the demand for apartments – especially by young professionals – could increase
- People need a place to live regardless of economic conditions. Those who get displaced from homeownership or class-A rentals will move to more affordable class-B and class-C rental properties
- Vacancy rates will remain low with the decline in construction of new multi family units
- In a volatile market, multi family real estate remains a solid investment for pension funds and real estate investment trusts
All of these benefits tell real estate investors that now might be a good time to buy a multi family rental property. And we’re here to help you find and evaluate multi family real estate for sale in the US. Our Real Estate Heatmap will help you analyze different areas in your market of choice to make sure you buy property in a good investment location. Using the Property Finder, you can find multi family homes for sale that match your budget and other criteria. Moreover, we also offer an Investment Property Calculator that will run all the necessary numbers (cash flow, cap rate, cash on cash return, and more) behind a deal to make sure it’s a profitable one. With Mashvisor, you can conduct a multi family real estate investment analysis in a matter of minutes!
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The Bottom Line
With stay-at-home orders in place that impact the majority of the US, most experts agree that it’s a very much a fluid situation for multi family owners and investors in 2020. It’s still unknown what toll COVID-19 will have on the multi family real estate sector in terms of market fundamentals, property values, investment opportunities, pricing, and cap rates going forward. Of course, two of the biggest factors that have a role in how things play out are how long the coronavirus pandemic will last and how quickly will the US real estate market recover. Still, experts point out the resilience of the multi family market and their hope for the future of real estate after the pandemic.
To stay up-to-date with coronavirus trends and their impact on the US real estate market, read our blogs on Coronavirus real estate trends.