Multifamily Market Musings: A Q&A With Paul Fiorilla

MBA NewsLink interviewed Yardi Systems Director of Research Paul Fiorilla about the multifamily market during the COVID-19 pandemic.

MBA NEWSLINK: What are Fannie Mae and Freddie Mac doing to establish clarity under the current market circumstances?

Paul Fiorilla

PAUL FIORILLA: I think Fannie and Freddie are doing an extraordinary job managing the situation under adverse circumstances. In a few short weeks, they’ve had to deal with an influx of applications when interest rates dropped, then they had to repeatedly modify/tighten loan terms for all their products as market conditions deteriorated and now also work with borrowers, servicers, tenants, regulators and other industry stakeholders to try to figure out how to handle forbearances, late payments and the like.

Both agencies have been providing liquidity and assisting landlords who can’t make payments due to tenants not paying. At the same time, mortgage pros say Fannie and Freddie have been proactive keeping them in the loop; that they are given regular updates on changes in loan terms and policies.

What strikes me is not just how well they’ve managed to handle the sudden upheaval, although that’s important, but how this pandemic may change the discussion surrounding the agencies. There has been so much liquidity in the multifamily debt market for so long that a month ago it didn’t seem outlandish to suggest that the market doesn’t need robust GSEs. Just as we see significant movement in the direction of privatization, we get an example of why the agencies were created in the first place.

The situation demonstrates why healthy GSEs are essential to maintaining stability in the multifamily debt market and why any reform must be undertaken intelligently.

NEWSLINK: Will multifamily continue to appeal to investors compared to other property types?

FIORILLA: Yes, I think so. Healthy capital conditions have been key to the success of the commercial real estate market over the last decade. All sectors have done well, but there has also been a clear delineation with multifamily and industrial at the top of investors’ lists. Multifamily now has some issues. With so many jobs lost, demand will weaken. Some tenants will have difficulty making rent payments, depending on how long businesses are shut down and how much assistance is provided by the government. Rent growth will turn negative in many metros. And we’ll see a pickup in loan defaults, which have been almost non-existent in multifamily.

All that said, in terms of relative appeal, I think multifamily and industrial remain at the top of the property type ranking. People need a place to live, and a drop in income (or even income instability) might force potential homebuyers to stay put in apartments. Industrial benefits from the rise in-ecommerce and should also remain attractive. Other property types have more potential downsides. Hotels and retail are suffering and are very risky right now, and a lot of people expect demand for office space to weaken permanently as a result of our national work-from-home experiment.

I think transactions will slow down considerably–acquisition yields are certain to rise, and how much will be an issue between buyers and sellers–but we probably will see an influx of opportunistic capital and multifamily should appeal to those types of investors more than other property types.

NEWSLINK: What multifamily assets (Class A, B or C) are best positioned to weather the storm? Most susceptible to a disruption?

FIORILLA: In my view, the apartments that will have the most disruption are the Lifestyle (Class A) properties. They have the highest rents and face competition from the 300,000 or so luxury units being delivered each year. Expensive new assets in the lease-up phase are likely to have the most trouble attracting new tenants. People are losing jobs, worried about budgets and staying put rather than moving unless necessary.

Class C properties might also have some issues, as tenants are most likely to be service industry workers who are losing jobs. That will be mitigated by the unemployment insurance program in the federal emergency package passed by Congress, but it will be a few months before we can judge the full impact.

That leaves Renter by Necessity (Class B) properties as the class best positioned in this environment. RBN assets started the downturn with higher occupancy rates: 94.9 percent average for stabilized properties nationally as opposed to 94.3 percent for Lifestyle as of February, according to Matrix data. RBN assets benefit from tenants staying put and being budget conscious. 

NEWSLINK: Multifamily permitting has fallen this year. Will developers hold off on starting new projects due to Coronavirus or is it a short-term disruption?

FIORILLA: Big picture, yes, development is going to be disrupted over the short term. How much depends on the location. In some cities, development is considered non-essential and worksites are being shut down. I’m based in the New York City area, which is locked down tightly because it has had many Covid-19 cases and a growing death toll. Some parts of the country are trying to operate normally. A friend of mine who works for a bank in the Midwest told me last week they are funding loans and many projects are starting on time.

However, any construction must deal with disruptions such as supply shortages or workers that are sick or staying home because they are afraid of getting infected. The Association of General Contractors reported last week that more than half of projects underway have been delayed due to instruction from an owner and more than a quarter were delayed by an order from a government entity. Matrix is tracking about 700,000 multifamily units under construction right now, and we expect those projects will get delayed an average of three to six months.

Another disruption to supply going forward is likely to be a reduction in construction lending. Banks generally will be cautious funding new projects until we know more about when life will get back to normal. That won’t affect projects already funded, but we’re likely to see a decline in new groundbreaking over the next 12-18 months.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at; or Michael Tucker, editorial manager, at