The 2020 calendar saw its last page turn and everyone, without exception, was happy to say goodbye to a year that nobody wants to remember. It’s exciting to have entered a new year and we’re all hoping that 2021 will be a complete change for the better. Many passive investors in multifamily real estate are wondering what the new year will bring, so I’ll review some current trends that will help to show what we might expect.
By way of background, I’m a multifamily syndicator, owner-operator, and investor in properties in Texas, Georgia, and Florida. We have 2,300 units, and my company is currently looking at properties in the Carolinas. Our focus is on Class B properties and we do value-add improvements to push rents and increase income.
In March of 2020, just as COVID hit the United States, there were many dire predictions about multifamily properties. It was predicted to be the “Armageddon,” with high vacancy rates and falling prices, but fortunately, those predictions never came to pass. Rather than dwelling on the past, let’s take a look at the current multifamily trends that are important to know now.
Occupancy and Prices are Stable
Occupancy is holding steady, with no huge shifts in either direction. Everyone was curious about what would happen to occupancy rates due to COVID, but their worst fears never materialized. Early negative predictions indicated that occupancy rates could fall by 10% to 20% or more. In fact, occupancy is currently running at 93% to 100%.
While many buyers were sitting on the sidelines waiting for “fire sale prices” on multifamily properties to appear, nothing happened. There hasn’t been an increase on cap rates or a decrease in prices because properties are doing well, and there’s simply no justification to lower prices. The only price declines are properties with 15% bad debt and higher or those with high vacancy rates. In those situations, the owners are unable to pay their lenders and stay current with their expenses.
When you look at how properties are performing during COVID, you’ll find that in most cases their performance is on a par with pre-COVID results. Multifamily properties have done well during recessions, and while no property is recession-proof, multifamily properties are showing that they are “recession-resistant.” That is particularly true during COVID; having the right property in a strong market is proven to be a good investment. In addition, with demand for multifamily properties still strong, there is simply no reason for sellers to reduce their prices.
Bad Debt is on the Increase, but so Are Rents
Whether you’re a passive investor or a property owner, nobody likes to hear the words “bad debt.” When tenants are behind on their rent, the rent is delinquent. After a certain amount of time, it becomes apparent that the renter won’t be able to become current, and the delinquent debt becomes bad debt since it’s not collectable.
Prior to COVID, a reasonable bad debt percentage was 1% to 2%, and in some instances, 3%. Since COVID hit, bad debt is running anywhere from 6% to 9%, but the higher percentage is found in Class C and Class D properties where the tenants are struggling with unemployment, as most of them worked in the restaurant and service industries. This