COVID-19 Economic Impact Reaches Small Multifamily Sector

COVID-19 pandemic effects are reaching the small multifamily sector, with loan originations and asset prices falling, reported Arbor and Chandan Economics.

The Arbor/Chandan Economics Small Multifamily Investment Trends report estimated full-year lending volume on multifamily loans between $1 million and $7.5 million will fall to $55.2 billion this year. Small multifamily originations reached a record-high $59.2 billion last year. The current estimate represents a 6.7 percent lending activity decline.

Small multifamily prices receded 0.9 percent from fourth-quarter 2019. “In periods of volatility, the difference between what a real estate buyer is willing to spend on an asset and what a seller is willing to accept, invariably grows,” the report said. “The net result is a lack of buying and selling activity. The uniqueness of the current crisis adds fuel to the fire, as even if a willing buyer and seller did come to an agreement on price, the ability to conduct the necessary due diligence to complete any transaction is severely limited.”

The report said average cap rates for small multifamily properties widened by eight basis points during the first quarter to 5.8 percent. “The most recent reading, in all likelihood, reflects a point of inflection,” it said. “Through February, both real estate and the economy generally were still improving on a year-over-year basis. It wasn’t until early to mid-March that COVID-19 had started to upend all aspects of normal business operations. In times of uncertainty, investors demand more yield to hold risk. As a result, cap rates may see further upward pressure in the coming months across all real property sectors.”

The extent to which small multifamily will see more or less pain than other real estate sectors depends on several factors, especially the dependability of in-place cashflows, the report said.

Despite the rather bleak current circumstances, the report cited several reasons for optimism. “The role of the agencies (Fannie Mae and Freddie Mac) in backstopping market liquidity and acting as a countercyclical stabilizer has never appeared more critical than today,” it said. “If business activity begins to return to normal in short order, it is possible that the rebound will be as robust as this contraction is severe.”

And despite the first-quarter drop, small multifamily asset values remain 5.5 percent higher than a year ago. “All else equal, the sector is better positioned to weather the storm than most,” the report said. “Multifamily tends to be a more resilient asset during periods of uncertainty due to the simple truth that people will always need somewhere to live.”