Published Expert Article
by Andrew Monette
Senior Advisor at Pinnacle Real Estate Advisors

Unprecedented. A word heard far too often, in my opinion, over the past few months. Defined by Merriam-Webster as “having no precedent (or earlier occurrence),” unprecedented technically is being used correctly in that we have never in our lifetime seen such a global economic response to an event of this nature. However, the market disruption we are seeing is, in fact, precedented. By no means is it a rule, but data suggests a market shifts, in a positive or negative direction, every eight years or so. With our last recovery cycle starting around 2010, the recent murmurings have been that we were somewhere near the top of our cycle and it could not last forever. In spite of the fact that we have been overdue for a market downturn, we should not look to the future with fear.

It is difficult to surmise the full impact COVID-19 will have on property values at this point, though some have tried. What we can be certain about is there will be a recovery and we will survive this, just like every other market cycle before. The Great Recession of 2008 likely still is very fresh in some people’s minds, and rightfully so. According to a 2017 report by the Online Computer Library Center, over 1.3 million Americans filed for bankruptcy in 2009. During that same year, the unemployment rate in the U.S. peaked around 10.1%, but this was a gradual loss in jobs and income that occurred over a multiyear period. It took approximately five years for the national unemployment rate to return to a more “normal” 5% range. Furthermore, the Great Recession was caused by years of loose lending standards and, arguably, greed as compared to the unforeseen pandemic that slammed the brakes on global economic growth this year. So how is 2020 different? Rather than the slow burn, in just one month’s time the national unemployment rate skyrocketed from 4.4% in March to 14.7% in April. It took just three months for the unemployment rate to then decrease by 25% to around 11.1%. Comparing this to the Great Recession, it appears the recovery from the COVID-19 pandemic should be much quicker if the trend can continue. When lenders pulled their chips off the table entirely during the Great Recession, it was exceedingly difficult, if not impossible, for deals to get financed. Cash buyers were the only group in a competitive position, and it led to an abrupt stop in real estate transactions. The current situation is quite the opposite as lender confidence in the recovery is apparent. Although some lenders have tightened their requirements on reserves, loan-to-value and other factors, there is an incredible amount of capital sitting on the sidelines waiting to be deployed. Additionally, interest rates are as favorable now as they were in 2015, which provides an incentive for investors to leverage cash to earn higher yields.

According to the National Multifamily Housing Council, 87.6% of July apartment rents already were paid as of July 13, with more collections expected throughout the month. At a more local level, according to the numerous self-managing investors and professional management companies I have spoken to, this number has been hovering between 90% and 95% in the Denver metro area. Fortunately, with rent collections remaining high up to this point, the multifamily market has remained strong. But this does come with a caveat – rent collections must remain stable to maintain lender and investor confidence.

It goes unsaid that owners with a lower LTV, or no debt at all, will be in a better position to weather any hiccups in rent collections when compared with those who may be overleveraged. This understanding has led to another relatively new phenomenon of lenders and owners, and owners and tenants having more open lines of communication and working together to navigate these troubling times. Among other creative solutions, many lenders are open to mortgage deferrals or loan extensions to assist with collection shortfalls, and landlords are trying to be much more flexible with tenants regarding lease renewals and incremental rent payments. The 2008 crisis did not yield such a collaborative environment. Tenants did not have protection or flexible rent options, and this resulted in an increase in vacant units, which lead to skipped mortgages and an influx of lenders assuming control of real estate assets. This, combined with slow job growth, meant a longer road to recovery than what most professionals see on the horizon for our current situation.

When this temporary situation resolves, we will in fact recover from this shake up. It should not be a long drawn-out recovery like we saw with the Great Recession. If the current Coronavirus Aid, Relief and Economic Security Act expires, as expected, and new emphasis is put toward employment growth, we should see steady improvement with consumer spending and consistent rent collections. There still are a lot of unknowns, and until the dust finally settles, we will not know the full extent of how our real estate market has been impacted. What we can be certain about is that although this market shake up is different in many ways, the outcome will be the same as before – there will be a full recovery.

Featured in CREJ’s July 2020 Multifamily Properties Quarterly