FTW INVESTMENTS

Invest Wisely: No End In Sight

What do we mean when we say we’ll wait to do something “when the smoke clears?”

If you’re like me, it means that if some part of our lives has been disrupted, we’ll typically wait for the disruption to settle or go away before assessing the new landscape formulating a path forward.

After a battle during a war or major military conflict, leaders from both sides will often evaluate the damage, reassess their resources and adjust their game plans once the smoke settles.

Speaking of disruptions, the entire world has been dealing with one of the most devastating and lasting disruptions the world has ever seen – the COVID-19 pandemic, which has had far-reaching and lasting effects on every aspect of our lives – from the social to the economic.

As the smoke clears from the economic gut-punch of the pandemic, what can investors take away from the crisis, and what are they to make of the commercial real estate investing landscape going forward – specifically in the multifamily segment?

One of the key takeaways from a crazy 2020 is that multifamily is resilient. It will make one of the quickest rebounds of any commercial real estate (CRE) segment. It will continue to show strong demand as we advance – ideally positioned to insulate investors from the potentially damaging effects of inflation.

Multifamily, along with every other CRE segment, suffered in the early days of the pandemic, but as the year wore on, multifamily proved its resilience.

According to CBRE, multifamily weathered the 2020 recession better than most property sectors – only industrial held up better – and market deterioration was far less than in previous recessions. Multifamily is expected to recover to pre-pandemic levels by the end of 2021.

Data from the National Multifamily Housing Council (NMHC) shows that from April 2020 to February 2021, monthly rent collections in multifamily units were off only 0.1 to 3.1 percent compared to the prior year’s collections. Class B and Class C assets performed exceptionally well. While occupancy rates, rent collection rates, and overall rental rates dropped among Class A assets, they barely declined at mid-range properties.

While Class A properties experienced declines in 2020, especially in urban areas when businesses and social gatherings shut down, two factors helped bolster Class B and C demand – specifically for workforce housing.

These factors included: their suburban location and their appeal to occupations such as teachers, healthcare workers, manufacturing employees, and trade professionals whose work still requires a physical presence.

As the dust settled, one of the pandemic’s new norms was the remote workplace phenomenon. Untethered by a physical workplace and a daily commute, many workers moved away from more crowded urban locations to more open suburban locations. Class B and C properties – driven by workforce housing – benefited greatly from this shift.

Does multifamily demand show any signs of waning? Not at all. There is no end in sight for growing demand.

In the short-term, multifamily will experience rising demand, largely from “unbundling” – certain renters moving out of their parent’s homes or friends as job opportunities provide more financial flexibility to live independently.

In the long-term, high demand for homes and limited housing stock will continue to contribute to rising rental demand.

”Demand is high due to record levels of household formation and a range of other factors, while supply is constrained due to the hot home sales market and slower deliveries of new properties,” says Jonas Bordo, CEO, and co-founder of Dwellsy.

What this all means for the rental market is that high demand and low supply will result in continued rising rents.

Here are some eyebrow-raising statistics about the state of the rental market from Axios:

Rents are up 9.6% nationwide in 2021, to an average of $1,649 a month, according to Dwellsy, which calls itself the largest rental housing platform in the country.

“Renting activity is back to pre-pandemic levels — up 13% in the first half of 2021 compared to the same time last year,” per RENTCafé. It adds that the two groups pushing rents up most are Gen Z and high-earning millennials.

“Every one of the nation’s 100 largest metro areas has seen month-over-month rent growth over the last five months,” Christopher Salviati, economist for Apartment List, tells Bloomberg.

For investors, it helps that rising wages from labor shortages have supported these rental increases.

Suppose you’re an investor who likes to wait for the dust to settle before forging a plan forward. In that case, it’s clear from what we’ve learned about multifamily during and after the pandemic; the path ahead should include multifamily in the mix.

To summarize, here are the reasons why a wise portfolio should include multifamily in its allocation: