With the COVID-19 outbreak and subsequent stock market plunge, the first quarter of 2019 delivered a shock to the United States as citizens hunkered down at home and companies grappled to adjust and weather it out. While the economic effects will be measured in the months and years to come, many in the apartment sector are looking now at the immediate and projected impacts on rentals.
Multifamily performed extremely well over the past decade, nearly immune to dynamics that impacted other real estate classes. The sector remained strong into the first quarter of this year. Solid fundamentals and demand, as well as short supply in key multifamily categories, continued to carry it through. However, as we wade through these unchartered waters, the big question is: Will rental housing maintain its performance?
Prior to the virus outbreak, experts agreed the real estate cycle was mature. Even as many debated the possibility of a downturn, demand for apartments remained high in part because various groups—college students, workers, singles, couples, families—consistently sought units. Notably, a look over time indicates these target groups are continuously replenished by younger up-and-coming generations. A prime example today is older millennials moving out of apartments to purchase homes and being replaced by younger millennials.
The affordability of for-sale homes also directly influences demand for rentals. Home purchases remain unachievable to many. The National Association of Home Builders/Wells Fargo Housing Opportunity Index found that just 63.2% of new and existing homes sold nationwide between the beginning of October and the end of December were affordable to families earning the U.S. median income of $75,500. This statistic reveals a national housing affordability crisis.
These demographic and affordability dynamics support demand in multifamily; however, the sector is facing some challenges. New construction is one problem area. Construction costs have been climbing the past few years leading to a pronounced imbalance in unit makeup. Upscale, amenity-rich communities abound, while new supply in workforce and affordable rentals is sparse, despite crushing demand. The National Low Income Housing Coalition in its 2019 Out of Reach report found just 4 million rental homes are affordable and available to the nation’s 11 million extremely low-income renter households whose incomes are less than the poverty rate or 30% of their area median income.
The recent spike in the country’s unemployed, due to COVID-19, is likely to exacerbate this problem. Additionally, the unemployment spike has led many municipalities to issue temporary stays or bans on evictions, with the long-term effects on the sector unknown.
However, key silver linings are present, especially in workforce and affordable properties. Lack of new supply presents huge opportunity for owners and investors in existing properties. Lenders are finding opportunity as well as demand for debt on these smaller communities is high. Freddie Mac and Fannie Mae, along with their lender partners, are highly active in this arena, working with borrowers nationwide. Considering the magnitude of the affordability crisis, it is unsurprising that rentals remain critical to their overarching housing missions.
Another positive driver is underwriting for this asset class. Pre-recession due diligence proved adequate enough for multifamily loans to perform well during the deep downturn. Underwriting today is also increasingly sound, and significant issues aren’t expected in the near term. Additionally, the appetite for refinancing transactions is rising as market conditions favor them. Notably, whether refinance or acquisition debt is sought, lenders with diverse loan offerings will be better able to serve borrowers and maintain housing affordability for millions of Americans.
Issues with the economy, unemployment, and the COVID-19 recovery will take some time to work through. However, demand for rentals, especially in the affordable and workforce categories, will remain constant. It’s more important than ever that our industry’s leaders work to ensure that lower-income Americans have a place to call home.