Right now, every apartment owner is trying to better understand how COVID-19 will impact their current portfolio—and how they should respond. Yet, in large part because multifamily real estate has yielded such substantial returns to investors over the last 10 years, there is eager capital on the sidelines waiting to invest in distressed assets. A lot of it.
Institutional investors consider multifamily properties one of the safest and best-performing asset classes in the world, but small and aspiring landlords with liquidity or refinancing capacity will also be able to take advantage of investment opportunities with strong return profiles on the horizon.
Now is the time to be realistic. Articles, like this one from Forbes, have posited that the time to start investing in real estate rental properties may be now, but there is also evidence to the contrary. We are only three months into a prolonged battle with COVID-19 that has no guarantee of success until we have a vaccine. Moreover, economists expect national unemployment near 20% in June, and the government has now performed three bailouts, totaling nearly $3 trillion. Hedge fund manager Ray Dalio thinks we are headed into a three-to-five year economic restructuring, and the IMF has predicted that the COVID-19 crisis will be the worst recession since the Great Depression. Even people with rose-colored glasses must acknowledge that the worst of the economic impact has not happened yet. Remember, the average length of all recessions in modern times has been 11 months, while the Great Financial Recession lasted 18 months from peak to trough.
Where and when are the buying opportunities?
While the outlook isn’t bright, there are going to be opportunities to buy properties at a discount, and private investors should be prepared. Given that most properties have less than six months of reserves, markets will likely see distressed assets and eager sellers in the latter half of 2020. It takes time for banks and owners to work out of these situations, but as the economic recovery elongates, great buying opportunities could last for years.
Once these properties start to hit the market, we expect to see a higher number of good buys in the non-institutional segment of the industry. In the private client market category, which includes investors with five to 50 units, certain life events could also pressure owners to sell assets. This includes not only job insecurity, but also death, divorce, and dissolution, all of which are more likely during this particular recession. The COVID crisis could also impact recently purchased assets that have too much leverage or interest-only periods expiring without possessing the necessary reserves to weather asset-specific challenges.
Be Selective and Prepared
While the road ahead is certainly bumpy, multifamily will always satisfy an essential human need: housing. With positive demographics propelling the industry, future return characteristics remain strong. As a result, investors do not need to perfectly time their acquisition. Instead, once you decide to start your search, it's paramount to select the right market based on your risk profile and personal circumstances.
Once you have a target property, follow basic investment guidelines—especially during a downturn. That includes analyzing rent rolls, demographic trends in the local market, overall return expectations and data on rent and occupancy assumptions. Great investment opportunities will be available to the patient, diligent, and informed buyers.
At Awning, we feel passionate about using technology to streamline, virtualize, and automate previously rigorous and time-consuming processes. Before COVID, the need to adopt new technologies was pressing, but now in the time of COVID, it has become mandatory.
Let us know how we can help you find your next investment property.