Q3 2020 State of the Union for Multifamily Investing

What a crazy time we are in right now!  If you would have told me there would be a global pandemic 6 months ago, I would have said you were crazy.  We've all been impacted in so many ways and are still learning to deal with this new "normal."  I'm passively invested in a number of properties and I hold my breath each month I get the monthly updates.

I just got done watching a multifamily meetup on Facebook hosted by Aaron Katz in Plano Texas.  Aaron has been syndicating apartment deals for 9 years now and has a very successful track record.  It was an amazing presentation with tons of relevant information to what's going on right now in the multifamily space across the United States, with some specifics for the Dallas-Fort Worth (DFW) area of Texas. 

The presenter, Paul Peebles, a national underwriter for multifamily loans with Old Capital, does a great job at presenting both current and relevant information, whether you are a passive investor or syndicator in the multifamily arena.

Below is my high level overview and observations I made from the meetup.  I also included some bulleted notes provided by Paul Peebles.  I highly encourage you to view the video.  It's 50 minutes long and well worth the time.

Overview

The Good

At a high level the multifamily space is still performing very well.  Interest rates are super low, occupancy rates have changed very little and investors have a higher confidence in multifamily than they do in things like retail space, office space, and hospitality.  This combination has further compressed the CAP rates to 5-5.5% on C+ on up to B+ properties in the DFW area.  Properties built in the 1990's and 2000's are a sweet spot.

Back in March there was speculation that COVID-19 would lead to discounts on apartment purchases in Q3/Q4 2020 but that hasn't been the case.  Income has gone down slightly in some instances due to owners allowing for concessions, yet occupancy has remained nearly the same.  For my investments, occupancy has actually increased.

Below are the vacancy rates for 5 of the properties I'm invested in.  As you can see vacancies have actually gone down on most of these properties.

                      March 31st      April 30th   May 31st      June 30th

Bradford         13.48%            12.92% 1         1.80%            7.30%

Casa Royal      6.72%              7.46%             4.85%            2.99%

Crescent City 25.91%             27.13%           21.34%         17.38%

Jackson          23.29%             13.70%           15.07%           9.59%

Shadowtree   13.75%              7.24%             5.37%           5.37%

Average        15.91%             13.57%           10.82%         8.47%

Everyone around the world is searching for yield right now.  Apartments are one of the few things still providing yields.

Interest rates for things like CDs (0.5-1.7%) savings accounts (~1.0%) and bonds (0.5-2%) have very low returns right now and this trend is expected to continue. 

Note: My year to date 401k rate of return is -1.05%.  It's slowing inching back to 0% but the stock market isn't expected to sky rocket anytime soon.

• - German Bund is at -.44%
• - LIBOR is at .16% (London Inter-Bank Offered Rate)
• - SOFR is at .13% (Secured Overnight Financing Rate)

Interest rates are likely to remain low for a while.  In a recent report provided by the Pensford, they present Bloomberg's analysis of the Feds 10 year Treasury rate.  Bloomberg's model puts the T10 at 0.75% at year end and just 1.15% at year end 2021.  We are likely going to be dealing with low rates for a long time.

Bloomberg T10 Forecast 07/06/2020

The Unknown

The CARES Act

The extra unemployment benefit from the CARES act is coming to an end at the end of July.  For anyone that doesn't know the CARES act is a $2 trillion economic package that offeres aid to individuals and families.  It includes things like implementing temporary eviction bans, expanded unemployment benefits, foreclosure bans and student loan forbearance.  Anyone receiving the extra $600 per week in unemployment benefits will no longer be receiving this.  Additionally, the CARES act eviction moratorium that was in place for 120 days is set to expire July 25th.  In Texas there is now a 30 day notice to vacate before eviction.

Higher Rates

Also from the Pensford report there are two things that could lead to higher rates. If you pay any attention to the stock market it's pretty easy to see that the volatility of the stock market is driven by speculation.  The market moves based on expectation of growth, inflation, consumer confidence, presidential elections, etc. The Pensford report calls out, and I agree, the #1 and #2 causes of higher rates in the near term are:

1) A vaccine

2) Improved data of COVID-19

Per my Apple News feed, there are a number of pharmaceutical companies touting they are nearing completion of a viable vaccine.

Wave Two

Here in the United States we are in "Wave Two" of the COVID-19 spread.  Several states that have reopened have seen huge spikes in reported cases and hospitalizations.  This is leading to re-closures and continued impact to the job force, leaving several unemployed or on a very limited income.  If business can't open or have to work in a limited capacity then people can't work.  There's just no way around it.  Will the CARES act be resurrected and infuse cash back into the pockets of the unemployed?  That’s anyone’s guess but the government can’t bleed money like this for much longer.

Summary

Overall, I think multifamily will continue to remain one of the strongest investment classes as we continue to navigate through these uncertain times.  I think by Q4 or Q1 2021 we'll see mass produced vaccines that start to take the pressure off the global economy.  The unemployment will continue increase the affordability gap for families looking to buy homes, which will lead to decreased construction of new developments, which leads to an increase in renters.  Humans are very resilient. We are innovative and hungry to work. Businesses will find ways to keep their doors open by shifting to business models that allow them to serve the public while social distancing or they will create all new businesses that provide services for the current need of the economy.

Bulleted Notes from the Meetup

Multifamily Loans – Current State

• - $10,000,000 amortized over 30 years at 3.10% rate (75% leveraged)
• - $10,000,000 at 2.9% (65% leveraged)
• - 3-5 years interest only
• - Fixed for 10 years or floating based on LIBOR
• - CAP rates in DFW area are 5-5.5% on 1990’s-2000's property

This means properties can be bought at this higher price but financing them at a much lower rate is where margins are realized.  Yield plays are a much safer bet then value add, since value add relies much more on speculation of reversion CAP rates and have very low cash flow.  Older properties require much more maintenance which can often be over looked in underwriting by the deal sponsors.

Interest Rates

• - No indicators that interest rates are going up
• - 10 year treasury closed at 0.62% on Friday
• - 10 year treasury closed at 2.074% last year at this time
• - 10 year treasury has averaged 4.45% long term

Lending Overview

• - Fannie and Freddie still lending (fairly aggressive)
• - Regional banks: recourse loans - (only on make sense deals - extended on their balance sheets)
  
• - Non-recourse bridge lending (a few still lending - more difficult to do right now)
• - CMBS (Commercial Mortgage Bank Security)- still mostly out [pretty much stopped] (trying to figure out office, retails & hotels dispositions - these types of institutions are struggling to pay their loans)
• - Fannie and Freddie still requiring additional collateral (will be able to get it back as long as there is positive rent growth and the Debt Service Coverage (DSC) ratio is 1.25 or better after 9 months or so)
• - Loans Under $6 million - 18 months of P&I
• - Loans Above $6 million - 12 months of P&I

DFW Multifamily Market

• - Starting to see some activity on RESALE apartment market in DFW
• - Buyers still cautious; sellers still want hard money
• - Some sellers are allowing for finance contingencies (this is not normal but sellers are working with buyers)
• - Covid 19 distressed assets are not there unless that asset was troubled prior to March 2020
• - Older assets in more demographically challenged areas are having more collection issues - (High crime, bad schools, people who have one head of household with kids. C to C- area)
• - Property taxes and insurance increases are a huge concern (Insurance rates have gone up and deductibles have gone up. Deductible buy downs are an option but it drives monthly premiums up. Almost $700/per door in insurance which is a large increase over normal. Property taxes are up a lot right now as well)
• - 47,000 units under construction in DFW; over 106k in planning and permitting stage in April (likely on hold) - (DFW has built more apartments for the last 25-30 years that any place in the world. More than New York and San Francisco)

How to find Aaron Katz

A big thank you to Aaron Katz for allowing me to post a blog based on his meetup.  If you would like to contact Aaron you can email him at: [email protected] or you can find him right here on BiggerPockets https://www.biggerpockets.com/...

If you are in the DFW area you can attend one of Aaron's meetups by joining his group on Meetup.com: https://www.meetup.com/Aaron-Katz-Dallas-Ft-Worth-Apartment-Investing-Meetup/?_xtd=gqFyqTIwNDQ4OTM1MqFwpmlwaG9uZQ&from=ref

You can access the full video of his most recent meet up here: https://www.facebook.com/1134902493/videos/10221841027351590.