The multifamily industry may not be in the ICU or in need of aggressive intervention, but it is certainly infected with COVID-19. Right now, the asset class is showing mild symptoms—a cough, a runny nose—and while fundamentals have deteriorated, they remain stable, for now. However, as the economy teeters on the edge, income and rent collections will continue to be the most important factor for the industry's overall health. Unemployment and corresponding legislation will entirely define the length and the depth of the damage. So far, the government has responded in a number of ways to the sharp increase in unemployment, and there are additional plans currently on the table to augment the support for renters, landlords, and lenders—hopefully in that order.
For renters, extending unemployment benefits will be meaningful. The CARES Act currently provides an extra $600 in unemployment benefits per week through July 31. The standard average weekly unemployment benefit is $380, roughly 40% of wages, but the $600 supplement raises unemployment insurance benefits to normal working wages or even higher than normal working wages for some workers. With unemployment currently at 13.3%, the increased unemployment benefits have helped to prop up rent collection. As a result, the multifamily industry's overall rent collection is only down 3% on a year-over-year basis, but executed rents and occupancies are beginning to decline. Complicating matters for many landlords, the CARES Act also came with an eviction moratorium ending July 25, 2020.
The CARES Act didn’t forget property owners. Under the CARES Act, multifamily borrowers that meet specific requirements can apply for up to 90 days of mortgage forbearance. Qualifying borrowers must have a federally backed multifamily mortgage—Fannie Mae, Freddie Mac or HUD—must be current on payments as of February 1, 2020, and must be able to prove a financial hardship due directly or indirectly to COVID-19 to take advantage of the emergency benefit. Additionally, multifamily landlords can apply for relief under the Economic Injury Disaster Loan Program. This program permits the Small Business Administration (SBA) to provide loans of up to $2 million at a capped interest rate of 3.75% and a term of up to 30 years.
Liquidity is essential for the multifamily industry to function normally. Freddie Mac, Fannie Mae, and HUD have been an important part of the industry's growth over the last 10 years. In 2019, Fannie and Freddie funded $148 billion in multifamily loans, an increase of about $6 billion compared to 2018. During the pandemic, the agencies have slowed their lending rate but are still actively funding new loans. In the private client market (PCM) commercial mortgage-backed securities (CMBS) have also played an important role in providing liquidity. The CMBS market was developed primarily to provide long-term financing for middle-market properties across commercial asset classes, but has predominantly been used by commercial borrowers. In the third quarter of 2019, however, the agencies temporarily pulled out of the lending market to restructure their lending caps. The move catalyzed a huge increase in CMBS lending activity for multifamily. As a result, CMBS multifamily issuance hit $12 billion in 2019, double the volumes in 2018. CMBS was expected to sustain that business through 2020; however, the market is currently operating at glacial speeds, and it would not be far-fetched to see CMBS volumes decrease by more than 50% in 2020.
In response to the slow-down, the Federal Reserve has presented plans to revive the Term Asset-Backed Securities Loan Facility (TALF), a program originally implemented in 2008 during the Great Financial Crisis. TALF 2.0 will inject up to $100 billion of loans into the market. The non-recourse loans will have a three-year term, and will be fully secured by eligible asset-backed securities. The original TALF program paid all loans in full on or before their maturity dates, and the program was considered a success. TALF 2.0 is currently light on specifics, represented by a meager three-page term sheet, and changes are currently being called upon to expand its impact. Once implemented, TALF 2.0 is likely to help the industry by injecting additional liquidity and reviving buying and selling activity.
As of June, the unemployment rate hit 13.3% nationwide, a surprising decrease compared to April’s 14.7% unemployment rate, but the Bureau of Labor Statistics suggested the true rate was higher. After adjustment for misclassification error, unemployment would likely be closer to 16.3%, and about 58% of unemployment claims are considered temporary layoffs, according to recent polling. The number of temporary layoffs, however, could decrease over time as businesses reopen at less than full capacity and the public health crisis continues.
Legislators are drafting measures to offset financial hardship and high unemployment. In more renter-friendly states like California, some legislation aimed at helping renters will also surely damage landlords. For example, an original draft of AB 828 in California allowed courts to reduce residential rents by 25% while implementing eviction moratoriums. While that version of the bill did not pass, it is an example that some legislators are looking to solve the crisis through forced rent decreases, which could ultimately depress values, hurt landlords further, and push investment activity into more landlord-friendly states. Instead, good legislation should continue to offer direct support to residents to help them to meet their rental obligations, simultaneously propping up landlords and lenders.
Before July, it is likely that Congress will pass more legislation that aids all three levels of the multifamily industry—renters, landlords, and lenders. If the government fails to act before the unemployment benefits and eviction moratorium expire, the industry could go from having a cough and sneeze to needing an emergency ventilator quickly.
At Awning, we stay informed of issues like legislation and market fundamental using a data and technology-centric approach so that you can be sure that the investments you make are good ones.