💥 Coronavirus Effects on Multifamily Real Estate & Investments

[Jorge Abreu]

• Coronavirus - Where Do We Stand Now?
• 
  Stock Market - Some Positive Signs here.
  
• Capital Markets - For the most part are frozen. Freddie/Fannie still doing some loans & some regional banks as well.
• Social Distancing appears to be working. The CDC said Monday that the U.S. is nearing the peak of its coronavirus outbreak and could reach it sometime this week. Then yesterday Trump said we are past the peak.
• 16.8M Americans filed for unemployment since mid-March.
• Treasury announced that 80M will get stimulus payments this week.
• A lot of applications submitted for PPP & EIDL. Not sure how long it will take to see these funds but if quick it should help. 
• Still no true plan of how things will open back up. However, Trump did announce there will be a conference tonight that will go over this. Most signs pointing towards June as far as really getting things opening back up but a lot of positives in the past few days. 
• One new model says no more deaths after June 21st. 
• Economists are optimistic the economy will bounce back in the latter half of 2020, growing at a rate of nearly 6% by the end of the year.

The Good:

• April collections came in stronger than most expected.
• Multifamily as an asset class fared among the best in real estate during the last recessions.
• Net Operating Loss for 2018-2020 can be carried for 5 yr.
• No penalties for taking out $100K from 401(k) & IRA's. A $100K loan against these. (Haley will speak about this in detail)
• On a typical deal, our break even occupancy on NOI is in the high 60% to 70% range.
• We continue to be bullish on multifamily real estate. People will always need a place to live. When we provide a clean, modern space with all or some of the amenities of a newly built complex, but at 30 - 50% less in monthly rent, we will continue to see strong leasing momentum coming out of this. 
• Regardless of the market cycle, we are confident that we can add more income to each property we own. And higher income will always have a value to a future buyer, even if the cap rates relax some. 
• There will be opportunities and we are already seeing them and taking action. 
• I believe there will be a smaller window of opportunity than most think there will be. Assuming we open back up sooner than later and with a good plan on how to do that. 
• Therefore, we are gearing up for these opportunities and will be getting some great deals! 
• April numbers are looking good and are surprising many. Class C is only lagging 5% or so from Class A & B 
• As government money comes in it might carry us through May

The Bad:

• Investors could be in trouble if there Deal Sponsor:
  • Did Aggressive Underwriting & Assumptions
  • Didn’t Account for Reserves
  • Purchased at or above Retail Price and isn’t structured to hold for a long time.
  • Has had Poor Asset & Property Management
  • Is not flexible & open to adapting quickly
• Definitely No distributions right now unless the property is driven by an industry that is striving right now.
• There will be No evictions, Less Traffic and some residents will take advantage. They are being given Bad information. Deal sponsors must be constantly communicating with their residents and offering the correct information and resources.
• Capital Calls ( but we currently see this as a better option than forbearance)
  • Come up with your estimated negative monthly cash flow then multiply it by 3 times and that is your capital call. Once you spread it over the number of investors, it is most likely a small number.
  • Dugan will cover this in detail though
• Financing - The Capital Markets for the most part are frozen right now.
  • The harder it gets to get financing, the higher the cap rates and the lower the values. But for how long?
• For Investors the Cash on Cash returns will take hit but as long as the sponsor does not run into default issues or pressure to sell the property the overall returns should not take that big of hit if any.

• On top of everything else you have groups promoting things like this and posting them all over apartments. It’s the worst thing they can do for these residents. They will end up owing more than they can catch up and eventually being evicted with really hard time trying to get approved for another lease.
  
• The Ugly:
• May & June Collections (Could be Ugly)
  • However NMHC’s report yesterday says otherwise)
• Prices will drop, Banks will decrease leverage, People will lose more jobs, Tighter lending requirements.
• Forbearance
  • This should be last resort before Default. Currently the terms laid out are not very favorable to the borrower and the overall property.
• Default, Bankruptcy, Foreclosures, Investors Losing their Investments
  • This is the last thing a syndicator would ever want to happen unfortunately depending on how long this last, decisions that are made and how the property was purchased (Price, Loan, Assumptions, etc..) it’s possible.
• These are worst case scenarios above.
• We do think there will be some of this happening but not for the majority and also very dependent on the area and what the industry drivers are for each specific area. This is where we see the opportunities.
• We are still extremely bullish on Multifamily and actually think this will bring in even more capital after the fact. Stock Market, Oil Money & others.
• The US still has a huge demand for affordable housing and the market will recover and Multifamily will fare better than most.