Apartment leasing continues despite the pandemic. Dominium’s tracking of move-ins, move-outs, applications and showings shows a trend that indicates the importance of housing. Not surprisingly, move-ins outpaced move-outs in May.

Applications have increased over the past 2 months with a 10% increase in April over March. Note: applications activity can be skewed by available units at any given time.

Not surprising, showings decreased significantly, despite the increase in applications. The ratio of showings to applications in 2019 was approximately 1:1. In 2020, this has shifted to 3:7 in April, with applications outpacing showings by 133%. Although showings remain low due to social distancing concerns, applications and move-ins have continued to increase.

On March 24th, Freddie Mac implemented a forbearance relief plan in response to the COVID-19 pandemic that allows qualifying multifamily borrowers to defer up to three months of mortgage payments. They released a report that provides an overview of this program as of April 13.

Florida Housing Finance Corporation has instituted a rule which provides that owners or developers of affordable housing that suspend any rent increases during the COVID-19 Public Health Emergency will receive preferences in future funding solicitations issued by the Corporation.

Marcus and Millichap’s special report on Commercial Construction details the slowdown in new construction and value-add and redevelopment across the country, and its potential implications for real estate developers’ strategies going forward.

 

COVID Feedback from the Brokerage Community

The following are a synopsis of conversations Dominium had with brokers over the past week:

• Multifamily sales have stalled. Only four multifamily sales occurred in April in South Florida. This is the lowest sale monthly volume in over ten years. First quarter overall multifamily sales totaled $209 million - 26% from Q1 2019. Second quarter sales will likely be among the lowest on record. The exceptions are deals that were already in progress pre-COVID and time-sensitive deals, such as 1031 exchanges, although new guidance has been released by the government for the latter. Properties that were listed for sale have largely been pulled from the market.

• Collections are strong. Collections have outperformed expectations in March and April. Operators are working with tenants on payment plans, waiving late fees, accepting credit card payments and security deposit conversions. The number one priority for operators—after resident and employee safety and well-being—is retaining tenants and preserving cashflow.

• Finding the Floor. Owners and investors are looking at collections to help find the floor in operations/NOI. Once the worst month for collections is realized, sale conditions are expected to improve. If May collections are similar to April and people start returning to work in May then the collection floor will be short-term. If the shutdown continues for longer, then it’s realistic to assume collections will lower and it’s a longer road to stabilization. Federal support is helping buoy rent payments and occupancy, but a drop off could occur when those programs roll off.

• Private Capital will lead the recovery. In the last downturn, private capital buyers were the first to start buying multifamily properties. I expect this will happen again this time around. Many private capital buyers are ready to enter the market on “finding the collection floor”. Dry powder is at record levels; in other words, there is tons of cash on the sidelines. 

• Returns. Encouragingly, investor returns remain in line with pre COVID expectations. Any pricing readjustment is likely attributable to a lower NOI from collections and not from a change in cap rate or IRR. Properties with strong collections will not see any meaningful pricing changes. 

• Debt. Debt markets are beginning to stabilize. Fannie Mae, Freddie Mac and certain local banks are the primary lender source for private capital investors. The time needed to achieve financing is longer due additional workloads being assigned to lenders as part of the government stabilization programs. Loans are being priced around 65% LTV between 3.7-4.2% with 6-12 months of reserves.

• Cap rates should not be changed for Covid-19, as it is a temporary situation. Changing cap rates incorrectly makes Covid-19 a permanent change instead of a temporary problem. Instead, Covid-19 affects rental rates / occupancy / delinquency for the short term. After the Covid-19 term, rental collections and therefore valuations return to “normal” defined as what they are before Covid-19.

• Duration. To determine the length of the Covid-19 financial impact, lenders / Institutions have asked for this language – “Our conclusions are consistent with the expectation of market participants.”