October 2020 Edition - Multifamily Properties are Not Distressed

Over the last few months, I have had multiple investors ask me to help them find properties that are distressed or had their prices reduced by 10% to 25%.  I have had to tell them, as I’m telling you now, multifamily properties are not distressed and are not being discounted.  I don’t anticipate seeing this happen in the foreseeable future.  If you want to invest in distressed properties you should consider retail, office or hospitality, but not multifamily.  So, don’t plan on seeing a wave of distressed apartment properties coming to the market anytime soon.

How have multifamily properties avoided being in a distressed situation and why do I think we will continue to avoid becoming distressed?   Our multifamily fundamentals were strong before the coronavirus pandemic, they have held strong during the pandemic and they will be stronger after we have gotten through the pandemic.  People always need a place to live and apartment living is the answer for millions.  Up until the end of July, rents for apartment properties were supported by Federal assistance that helped millions of renters stay current. This program expired on July 31st.  August was the first month that Americans went without the extra $600 a week provided by the March 2020 CARES Act.    It is unclear when or if Washington will provide additional help.  Owners and their property managers worried that considerably more renters would fall behind in September, but there was only a small increase.  Then we worried that more would fall behind in October, but instead they decreased.  

The National Multifamily Housing Council (NMHC)’s Rent Payment Tracker found that on-time rent payments in August were 79.3%, an increase from July’s number of 77.4%.  This compares to 81.2% in August 2019, a decline of 1.9%.  Not good news but not devastating.  In September on-time rent payments went down 4.8% to 76.4%.  October 2020 numbers have come back up to 79.4%.  The same as in October 2019 (79.4%). 

NMHC survey numbers are based 11.4 million units of professionally managed apartment units across the county.  The NMHC Rent payment Tracker has been a highly utilized tool during the pandemic as it has given the Government Sponsored Enterprises (GSE’s) and their lenders insight into how effectively owners and operators are collecting rents

Another reason I believe we will not see our multifamily industry go into a distressed state is the availability of capital.  Investors are holding a ton of capital, waiting eagerly to be deployed as soon as they feel some relief in the level of uncertainty of where the overall economy is headed.  The federal government has moved quickly to resolve this concern.  In addition to the CARES Act, the federal government moved to cut interest rates as a fiscal tool to help guide the economy.  The Federal Reserve slashed the federal funds rate in mid-March to near zero percent, where it remains to this date.  In addition, the GSE’s Fannie Mae and Freddie Mac continue to buy up multifamily mortgages in the secondary market at a healthy pace.  

Fannie Mae’s network of Delegated Underwriting and Servicing lenders provided $14.1 billion of Fannie Mae loans in the first quarter of the year compared with $16.9 billion of Fannie Mae loans in the first quarter of 2019.  Also, the pandemic has not hampered Fannie Mae’s activity since the end of the first quarter.  In fact, Fannie Mae lenders closed more loans in April and May of this year ($12 billion combined) than in April and May 2019 ($10.9 billion) while Freddie Mac’s network of lenders provided $11.3 billion in loans in April and May.

Frank Lutz, chief production officer of agency lending for Arbor Realty Trust, says that his firm has only increased its Fannie Mae and Freddie Mac loan production in the past three months.  “We’ve had some of our strongest months of agency lending during the pandemic.”

Fannie Mae and Freddie Mac have been smart about how they have dealt with uncertainty.  They have instituted debt-service reserves on all but the most conservatively underwritten loans.  Both agencies are requiring debt-service reserves to ensure that borrows will be able to make their payments even if they have to withstand revenue losses from late rent collections or other hardships.  The reserves are typically 6 to 12 months of mortgage payments.  

We are, however, living through historic times.  Investment sales activity in multifamily has dropped off significantly, thus acquisition loans have followed suit and have slowed down.  Real Capital Analytics data shows that U.S. multifamily property and portfolio sales totaled $3.5 billion in April 2020, down 70 percent from April 2019. In this environment, we are seeing acquisition deals driven more by certainty of collections and value than low interest rates.  With that said, one unassailable truth that has emerged from the pandemic is that the Government Sponsored Agencies are critical to the health of the multifamily industry by providing stability in the multifamily mortgage market.

“Just-In-Case You Missed It” is a monthly letter prepared for multifamily owners and prospective owners.  It is a compilation of multiple articles from multiple sources or a reprint of an article from a specific source (source credit given).  Its purpose is to present both facts and opinions that may influence our multifamily business in the Southeastern U.S. If you have any questions and/or would like to discuss any of the comments above, my conclusions or your multifamily business, please contact me at your convenience.  I can be a valuable resource to you without adding any expense to your budget.  I look forward to speaking with you and having an opportunity to meet with you.  I am always at your disposal to assist you with your multifamily business.  If you would like to review previous editions of my monthly “Just-In-Case You Missed It” letter they are posted on my website, www.rickbakermultifamily.com. 

Respectfully

Rick

G.F. Rick Baker, CCIM 

Multifamily Specialist/Investment Advisor 

www.RickBakerMultifamily.com 

2504 Tinderbox Ln.

Greensboro, NC 27455

Cell: 336.549.6083 

Email: rickbakermultifamily@gmail.com

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