Updated: Mar 7
The COVID-19 pandemic has hit every part of the country, every part of the economy and every facet of the real estate market, including investing in multifamily properties. In the United States alone, tens of thousands of lives have been lost, unemployment is up to a staggering 17.8 million people, and many experts say it may get worse before it gets better.
However, people are still investing in real estate, including multifamily properties. Many investors think this has become a “buyer’s market,” while others believe that we’re in a “seller’s market.” Investors claim that they have seen this type of multifamily real estate market before, during the great recession of 2008. Prices have steadily climbed over the past 10 to 12 years, and investors felt that exceptional deals would once again be available. In their minds, it was simply a matter of waiting it out.
Tenants are Still Paying Rent
The biggest concern was that with unemployment at an all-time high, renters wouldn’t be able to pay their rent, forcing the multifamily property owner to sell his or her property at a discounted price. Despite media reports that predicted that a high number of renters wouldn’t pay their rent, the prediction never materialized. Now, I believe we’re in a “frozen market,” where there’s a gap between buyer’s and seller’s expectations.
According to recent national data, April's and May's rental collections were at 95%. June ended at above 90% collections.. My personal experience with our properties, which are located in Texas, Georgia, and Florida, was that we had 99% rent collections. That’s a far cry from the 75% collection level that the media had predicted.
Buyers were expecting rent collections to drop significantly, which might have moved multifamily prices to drop. Usually when we’re in an economic crisis, the market shifts from a seller’s market to a buyer’s market. That’s when buyers jump in and purchase properties at a significant discount, which is what happened in 2008. However, as I mentioned before, this didn’t happen to many assets. Yes, there are properties that have got hit pretty hard and their collections are way below 95%, but many properties thus far are not doing that bad during COVID. That’s why sellers, for the most part, are not willing to sell at a discount.
Lenders are Changing Loan Requirements
Another aspect of the current multifamily market is due to lenders, who are in the process of changing loan criteria. For example, lenders are giving property owners 90-days forbearance on their mortgages due to the COVID-19 crisis. That means that the expected discounted property prices buyers were expecting simply didn’t materialize. Sellers aren’t really incentivized to sell, not in the first 90 days of COVID, at least. Lenders still remember how painful it was to foreclose on assets during 2008, and are doing their best to avoid this scenario again. My gut feeling is that by the end of the summer, we may see many more deals in the market, as more and more sellers will be at the end of their forbearance period.
Lenders are also more reluctant to lend money at terms they were offering prior to the COVID-19 outbreak. For example, lenders used to require a loan-to-value ratio of 70% to 75% prior to COVID-19 on a solid value-add deal. Now, they’ve lowered the amount their willing to lend to 55% to 65% LTV, which means returns will be lower because you have to put more money into the deal. With lower returns, buyers must lower their prices to meet their minimum returns.
Another change is a new requirement from lenders that at closing, you have to put 12 months of debt payments into escrow. That’s a lot of capital going into each deal, which means that a deal that might have worked several months ago won’t work now. That’s how lenders are reacting to this rapidly changing environment, and they’re trying to predict which properties may default on their loan, for example. The extra capital also affects returns, which, in turn, means lower offers.