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Turbulence and Optimism: As Federal Unemployment Runs Out, Multifamily Industry Keeps Its Eyes on the Bottom Line

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By Meghan Hall

A healthy multifamily industry is generally built upon tenants’ ability to pay rent. While the nation’s unemployment rate moderated slightly in June, declining 2.2 percentage points to 11.1 percent, according to the U.S. Bureau of Labor Statistics, those in the commercial real estate industry are keeping a careful eye on rent collections and their bottom line. As the end of July—and the expiration of the CARES Act and federal unemployment nears—it remains to be seen how the multifamily industry will fare. Experts in the Puget Sound, however, believe that the region’s strong, technology-based economy and the type of market correction currently in effect will ultimately provide a silver lining in the months to come.

“It’s bad—that’s the short presentation—but there is hope, and it is getting better,” explained James McCafferty, Director for the Center for Economic and Business Research at Western Washington University. “But it might get bad again before it gets a lot better. Just know that’s the general shape at how we are looking at this.”

The United States experienced a nine percent decline in GDP during the second quarter alone, and McCafferty predicts that elevated unemployment levels will continue through the next year to year and a half.

According to experts at a Puget Sound Multifamily Forum hosted by The Registry, the Puget Sound has about 634,000 renter households, a number that is expected to grow by nine percent in the next five years. That demand will create a need for some 57,000 new apartments in the long-term. 11,239 units are set to be delivered in 2020 but net demand over the next year is only expected to come in at around 2,500 units.

Thus far, vacancy and rental rates have held relatively stable, which the economists and housing experts have largely attributed to a stable local economy and the aid provided by the CARES Act. However, they also emphasized that the real economic hit remains to be seen.

“Vacancy is stable because we haven’t hit the point where people are picking up and moving out,” stated Brian O’Connor, of O’Connor Consulting. 

An influx of new inventory, when combined with lower year-by-year demand. will likely cause rent growth to stagnate and vacancy to climb. Vacancy is expected to increase to six or seven percent by next spring, while rent growth is unlikely to occur until 2022.

“One of the interesting things that we are seeing right now is that everything is so heightened; the pendulum has completely swung all the way to one direction, and now it is starting to come back” said Candice Chevaillier, principal with Lee and Associates “Everyone’s really watching the July 31st deadline. That’s when the federal money is going to burn off. That is when the rubber is really going to hit the road if that doesn’t get extended.” 

For now, no extension is in sight. Currently, landlords, investors and assessors are attempting to determine what rent collections will be like in the coming months after the CARE Act runs out, and how that will impact property values moving forward.

“This is going to be a long game. This is going to take time,” added Chevaillier. “We don’t even know what we’ve lost yet.”

While many in the industry expected some sort of slowdown simply because of 2019’s record-breaking activity, coronavirus only worked to slow things even further. As activity picks up again, the big question for many will be underwriting: Assessors will be looking carefully at what actual collections are and the number of delinquencies, which will ultimately impact property values and bottom lines. Currently, property values are down anywhere from three to eight percent as a result of the current economy.

There is some hope on the horizon: Debt markets are stabilizing and investors have allocated capital waiting in the wings, and over the past several weeks, deals have started to move forward once again.

“Turbulence and cautious optimism are probably the two themes for me,” said Don Flanigan, vice president at Lee and Associates. “All of 2020 is going to be information gathering.” 

Flanigan continued, “Over the last seven, eight, nine years, we have been able to paint a very strong story. I think it’s okay to be cautious short-term, but when you look at the long-term story of Seattle, it is okay to be bullish. There are a lot of opportunistic buyers out there right now.”

According to Seth Heikkila, vice president of Capital Markets at Institutional Property Advisors, lenders are also likely to become more bullish in the months ahead due to large supplies of capital that have yet to be deployed. Because 2019 was a record year in terms of transaction volume, lenders had already allocated high amounts of capital for 2020.

“We have seen pricing come back; we’re starting to see construction lending come back, and I would anticipate because of those increased allocations based on 2019, that a lot of these groups have a substantial amount of capital to put to work,” said Heikkila. “I wouldn’t be surprised to see lenders getting even more aggressive as we move into Q3 and Q4.”

The biggest concern for many in the multifamily industry moving forward, however, has less to do with market fundamentals and more to do with legislative and regulatory measures. Initiatives like rent caps or eviction moratoriums could have a major impact on the multifamily industry moving ahead, particularly as officials balance ways to keep the economically vulnerable in their homes and landlords afloat. 

“When I look at our region, and the diverse economy, the job economy, the diverse number of industries…I’m not concerned,” said Chevaillier. “…The regulatory piece, that’s the big wild card.”