Choppy waters, rough seas, long and winding road, roller coaster ride—I’ve run out of ways to describe the ups and downs of multi family real estate investing in the COVID-19 market. Navigating a pandemic involving an economic shut down, a global supply chain failure, and unprecedented travel restrictions is, for most of us, a first.
Performance, recovery, and outlook has varied across different sectors of the real estate industry. No matter how you read it, it’s a persuasive market. There are reasons to take action and there are reasons to wait until we land on stable ground. Either way, it’s a valuable asset at a time like this to understand the forces at play and the nuances they contain. With that baseline understanding, the task of looking forward, casting your bet and taking your place in the market simplifies, wherever your place may be.
Multifamily Real Estate Investing: An Overview
If we zoom in on the multifamily real estate world, we can see the kinds of short term losses and fragilities that have been predicted and observed in nearly every industry. A September 9th report by UBS confirmed that the Real Estate Investment Trusts (REIT) have under-performed the S&P 500 year-to-date. If, however, you zoom in on the returns of REITs, you’ll see sectors meeting different fates as the COVID-19 chips continue falling as they may.
Taking that closer look, industry experts have been surprised to see trouble arising from the multifamily sector which, as a whole, has significantly under-performed. If we zoom in one last time, we arrive at the kind of market analysis that times like this ask for: the under-performance of the multifamily sector varies based on market type.
If you graph the vacancy rate trends for high-rise apartment buildings, you can see an early drop at the onset of 2020 and a slow, tentative recovery. Similarly, if you chart rent trends in dense, coastal markets (LA, NY, SF, BOS, MIA, SEA, CHI), you see that same steady drop, and a flat line where some might have hoped an upward slope would be.
But the same charts shift if we alter the building and/or market type. Vacancy trends for garden style buildings, two or three story buildings surrounded by green space and consisting of generally more spacious units, the initial drop is less drastic and the recovery curve steeper. Studying rent trends in non-coastal and Sun Belt markets (DEN, PNX, ATL, HOU, ORL, etc), the same decline appears, but small climbs can be seen, and the lows are not as low.
Between The Lines: Forces At Play
The forces shaping the multifamily real estate market are easily understood through a human lens. COVID-related job losses, the desire to socially distance in cities with less density, the ability to work remotely and the draw of more cost-efficient living in less-expensive suburban markets—all of these factors are bringing more and more people away from dense, coastal cities and toward more suburban and Sun Belt markets. This supports the under-performance of the REITs with economic exposure to California, Seattle, Boston, and New York, where vacancy is higher and rental costs are decreasing at a faster pace.
If job loss has been a catalyst to this extent, it’s certainly worth considering how job recovery will shape the market going forward. It’s clear that employment recovery is crucial to the strength of the multifamily real estate market. We’re already seeing rebounds in the coastal cities, specifically San Francisco. Further, many of the job losses have occurred in service positions concentrated in vacation cities like those along the Sun Belt rather than office jobs in dense cities. Still, a rebound is one thing; remote work is another.
The preference toward working from home in a more affordable, less dense suburban market is a trend many experts are expecting to continue.
A Question Of Strategy, Not Timing
As I’ve said from the beginning, opportunity abounds for investors who are willing to pull together a smart portfolio and hold on tight. Already, significant investment capital has followed tenants to the secondary and tertiary multifamily markets. Institutions and private equity investors are showing spiked interest in suburban areas with garden-style apartment types.
Further, this year has been a much-needed break from over-development, and with new development starts continually declining, investors can be confident that competition is coming back to the market. New capacity additions are expected to remain low over the next many years in the market, alleviating a major source of investment risk (particularly for portfolios focusing on sub-markets).
Last, we’re finally beginning to see an uptick in the industry’s use of technology, a long-awaited advancement that will help REITs and investors alike take their market involvement to the next level. It’s my strong opinion that smart investors are getting in on the ground level, positioning themselves for the positive gains that technology will bring.
By streamlining industry operations (automated self-leasing, self-guided or visual property tours) and by expanding operation margins and increasing data accuracy available to investors, technology is certainly transforming the real estate sector, and the multifamily real estate market has shown that it’s onboard. Far from a tech-forward industry, the arrival of PropTech is more than promising; I would urge investors not to miss out on the strange and nuanced opportunity of the moment in which we find ourselves today.