Covid-19 Multifamily Underwriting Stress Test Scenarios

[Ryan Daigle]

What does multifamily underwriting look like now given what we know so far of the impact COVID-19?

I know there are very few new transactions going under contract right now given the huge amount of uncertainty that still exists. It's natural to see both buyers and sellers moving to the sidelines right now. And, any transaction that does initiate will have a 6-8 month close delay (closing guidance from Freddie/Fannie). Still, we're facing a new reality at least for the short term and I'm curious what changes you're incorporating into your underwriting?

Here are the assumptions I've built in:

• Flat to slightly negative rent growth for 2020 and 2021
• Double total vacancy in 2020 (at least 15%-20%)
• At least one year of reserves (Fannie/Freddie may now require 18 months!)
• 20bps/year of exit cap rate expansion (minimum of one percent expansion if hold time > 3 years)

What do you think. Rational? Too optimistic? Too conservative?

[Serge S.]

@Evan Polaski its a roll of the dice right now and your mileage may vary based on asset class and location. I personally could not underwrite less than a total 20% economic which is most likely conservative. Its back the days of rebuild cost and intrinsic value.  Who knows when bad debt and vacancy stabilize. This makes for a very interesting resale market. Brokers are still listing deals based on 2019 results and trying to justify this a bump in the road. Feels like the pandemic risk is just the first domino to fall followed by turbulence in credit markets, inflation and regulation. This is just the beginning.