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Multifamily Investment Sales Broker at Marcus & Millichap
P: 630.570.2246
Randolph Taylor

The housing market has found stability in a time of crisis because of the interventions in the CARES Act stimulus, unemployment benefits, and eviction moratoriums.

The cap rates for small multifamily properties barely budged between the first and second quarters of 2020, according to a new report by Chandan Economics and Arbor Realty Trust.

Cap rates narrowed by 5 bps in the second quarter, landing at 5.8%, explained the article, which was published on lender Arbor Realty Trust’s website.

“In the first quarter, cap rates widened by 21 bps, and there was some concern that they would further inch up as the economic downturn continued. However, small multifamily cap rates held steady due to a pricing tug-of-war,” said the article.

Cap rates are influenced both by falling risk-free interest rates, and by operational risks, it explained.

“When both phenomena happen at the same time, the net result is cap rate stability,” said the article.

Chandon examined the difference between cap rates and Treasury yields to estimate what the risk premium is in small multifamily properties. Although the spread was the highest level on record in the second quarter, when you compare it to the first quarter, it barely budged.

The article said the housing market has found stability in a time of crisis because of the interventions in the CARES Act stimulus, unemployment benefits, and eviction moratoriums. But there are repeated debate about how resilient property cash flows will be when the protective measures expire.

For example, one survey in mid-July said that 39% of renters who earn less than $75,000 per year had no confidence or slight confidence that they would be able to pay their rent in August, the article said. That rate was 5% higher than a survey in the middle of June.

In higher income brackets, there is less concern about the ability to pay rent.

“Small multifamily renters tend to earn less than their large multifamily neighbors, increasing the concern for rent collections with this asset class,” said the article. “Simultaneously, small multifamily renters are comparatively less transient and less likely to transition into homeownership over the medium-term. With COVID-19 causing many young households to reconsider their housing location preferences, the small multifamily subsector may prove more resilient in re-leasing and maintaining stable occupancies over the medium term.”

The article warned that because there are so many moving parts, there will be an ongoing discussion about how the small multifamily market deals with the risks, compared with the rest of the industry.

 

Source: Globe St Angela Morris | September 08, 2020, at 05:43 AM

Multifamily Investment Sales Broker at Marcus & Millichap
P: 630.570.2246
Randolph Taylor
 

The Unintended Consequences and Risks of Forbearance

To stop the spread of Covid-19, communities are coming together, staying home, washing hands and social distancing to protect the most vulnerable. A similar level of cooperation is needed in the commercial real estate industry among tenants, owners, lenders and the government to prevent a cascade of bankruptcies. In the words of one commentator, we are “too connected to fail.”

For example, the $2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES) allows multifamily property owners who hold federally backed mortgages to request forbearance on their loans. The policy is intended to prevent a wave of multifamily loan defaults and potential foreclosures by giving owners some relief in the event tenants fail to pay rent. Though the forbearance provision is well-intentioned, many believe adjustments need to be made to better align the interests of tenants, property owners and lenders, and avoid dire consequences for the entire system. For example:

Landlords who seek forbearance can’t evict tenants, charge late fees or issue negative credit reports for those who fail to pay rent. While this is appropriate for people who have lost their jobs due to Covid-19, the policy covers all tenants, even those whose incomes have not be affected.

Many believe the Agencies should require tenant relief to be predicated on direct impact from Covid-19. Those whose employment can be documented should be subject to business as usual. This is particularly important as unemployment rises over time. A Wall Street Journal survey of 57 economists suggests that 14.4 million jobs will be lost in the coming months, and the unemployment rate will rise to a record 13 percent in June.

 
 

Though the forbearance provision is well-intentioned, many believe adjustments need to be made to better align the interests of tenants, property owners and lenders, and avoid negative consequences for the entire system.

Servicers are working on a case-by-case basis to help property owners, but since major modifications require Special Servicer sign off, we expect the bigger deals to be subject to significant fees. Meanwhile the Special Servicers may not have the bandwidth to address smaller deals, which may be ignored.

The good news is that we see evidence of owners, tenants and lenders across the commercial real estate spectrum coming together to avoid irreparable damage to the system. Most apartment residents understand that their rent payments are crucial to running a safe and livable property. The National Multifamily Housing Council (NMHC) found that 84 percent of apartment households made a full or partial rent payment by April 12, up 15 percentage points from April 5, based on a survey of 11.5 million units of professionally managed apartments across the U.S.

In addition, many landlords are being compassionate and flexible, offering modifications that can be paid back incrementally over the life of the lease when the crisis abates. Owners tell us they are communicating with tenants to find out who is facing hardship, and reaching out to elderly residents in particular who may lack a support system. Others say they are focused on maintaining staff and operations, as supporting tenants is the right thing to do and will have significant upside for the property’s reputation over time.

Finally, in this uncertain economic landscape, lenders are like doctors. They need to manage borrowers like a physician working to help cure a patient. To that end, we are seeing many banks, and some life companies, allowing shortfalls to be tacked on to the back-end balloon payment. Lenders also need to make allowances for this unprecedented situation and recognize that even the most stable borrowers may require forbearance and remain excellent candidates for future financing.