A Theory On Why Multifamiliy Won't be Affected By Covid

[William Coet]

 Correct me if there are things I'm missing, but here is why I think this situation is different for multifamily than any other recession.

This is not like any other economic crisis because the gov immediately decided to pay everyone to get through. People are receiving money directly into their accounts through the stimulus checks and an additional $600/week on top of their base unemployment payouts. Many will be earning more than they were while working. Gov. is saying these enhanced payments can continue for 39 weeks. They will likely be willing to continue longer if needed.

Nothing like this happened in any other recession or 9/11. The Average person was on their own during the 2009 crash. Now they are supported by government payouts almost immediately (some may have to wait for payments, but they are coming)

[Daniel Sperling]

@William Coet this is such an interesting problem to think through. I was able to find some data from the National Multifamily Housing Council's Rent Payment Tracker. Across the US, 84% of tenants paid their rent by April 12th. That compares to 90% the year prior. It also seems rent payment defaults will increase for May rent since there are delays disbursing unemployment benefits and payroll protection loans. Here's the source: https://www.nmhc.org/research-...

The US is a consumption-driven economy. Consumer spending comprises ~70% of GDP. According to Wells Fargo, consumer spending is down 35% at this point compared to same time last year. Saw similar numbers from Bank of America a couple weeks ago. I don't know about you, but this sounds right to me based on our family's own spending of late. If consumers don't spend, businesses can't pay employees, tenants can't afford rent, rent rates either need to be reduced or landlords need to accept lower rent revenue vis-à-vis higher non-payment rates. Other things could happen like employees forced to take pay cuts to keep their jobs, which will have a similar effect. Or we see a marked shift from homeownership to renting as people lose their homes which might support rent rates... Lots of different scenarios to consider.

Looking at public markets, Equity Residential (EQR) is down 25%, AvalonBay (AVB) is down 29% from February 21 highs. Income producing properties are valued based on cap rate, so from this perspective we should expect valuations to decline in the near term. This said, the Fed is pumping money into the economy which as we saw in the Great Recession should cause asset values to increase both as means of chasing yield with interest rates near zero and as a hedge against inflation (holding cash is not good in that environment).

I don't see consumer spending snapping back to pre-COVID levels. This will take time as the consumer needs confidence that their health and job is safe before spending on non-necessities / things that bring them out of their homes. I wonder if this economic shock might condition business and consumer spending to be more frugal over a longer time horizon.

That's just my 2 cents, not an expert but a long-term value investor. Will be interesting to see what happens! Stay safe and hopefully members of the BP community will weather this crisis and find some bargains along the way.