There’s no question that the COVID pandemic has impacted just about everything you can think of, including the impact that it’s had on commercial real estate and multifamily properties in particular. When COVID first began its deadly march across the US, many people in the multifamily real estate investment space had dire predictions. Vacancy rates that would decimate sponsors and investors, extensive bad debt, and tenants who had no intention of ever paying their overdue rent were amongst concerns.
Fortunately, those predictions never materialized. In fact, despite COVID, many property owners were able to actually increase rents, and, in some of our properties, by double-digit numbers. In addition, partly due to the American Recue Plan and other government subsidies, tenants were able to continue paying their rent throughout the pandemic.
Factors Impacting Our Decision
Our typical hold period with multifamily properties is 3 to 5 years. That is based on our business model of buying Class B assets with a value-add intention, and that amount of time is more than enough to renovate the units and capture increased rents and greater appreciation when we sell.
During COVID, however, we were acutely aware of taking advantage of any opportunities that came along, as there was still uncertainty in the multifamily market. We were not sure if the market would remain stable, or what impact the pandemic might have on our properties at the end of our projected hold period. That’s when an opportunity came along, and I decided to sell early.
Several factors came into play that prompted me to sell early. In our case, we wanted to take advantage of the fact that the market was a solid sellers’ market; there was a shortage of deals, compressed cap rates, and more distressed assets in the US. Simultaneously, the assets we wanted to sell were doing well, as they were highly occupied, and we’d successfully continued increasing rent rates. We knew that investors would like them and would be willing to pay a premium for them.
In addition, demand for multifamily properties in Atlanta, where our properties were located, has been on the rise as more potential buyers are moving from other markets like Chicago, New York, and San Francisco into Atlanta. This created a larger pool of potential buyers. In addition, buyers are moving to different asset classes, such as from office and retail, into multifamily properties. The demand remains very strong, and we held numerous tours from prospective buyers interested in our property.
The bottom line in my decision was that when we ran the numbers, we exceeded the investors’ projected return. We had projected a 16.5% IRR, and we achieved above a 25% IRR. If we were not hitting the investors’ expected return, there would be no need to exit early. But with above a 25% IRR, there was no need to wait three more years to sell based on the original hold period. The timing was too valuable to not seize for the benefit for investors.
Buying Practices During COVID
Buyers and investors are going to do their due diligence whether there’s a pandemic or not. What surprised me, however, was just how quickly due diligence could be done even during the Coronavirus Pandemic. In order to shorten the due diligence per