The spread of Covid-19 came on rapidly, bringing with it panic and equally rapid economic contraction. This has created an atmosphere of fear and volatility that’s not typically seen in public markets. With the current situation, you may be wondering what might be in store for the multifamily housing industry. While there’s no way to predict exactly how things will change over the coming months, here’s a look at where things currently stand.
The Pros
Despite market volatility and uncertainty, there are some positive developments right now. The 10-year treasury yields are remarkably low and the Federal Reserve has cut its benchmark interest rate to nearly 0%. In some cases, debt is less expensive than it was a month ago. If these low rates are sustained, it may create pressure to lower cap rates.
The Cons
Many Americans are currently unemployed or have reduced hours due to the Covid-19 restrictions, which means tenants may fall behind on their rent. Lost wages and the drop in equity values create a risk to multifamily property net operating value. This could consequently threaten the security of what’s been typically seen as a recession-proof asset. Although the multifamily asset could remain resilient, the effects of declining occupancy and net operating income directly impact valuations. This could potentially affect capital markets, as fewer owners would qualify for conventional financing and there may be a risk of defaults.
Mortgage agencies like Fannie Mae and Freddie Mac are increasing floors and spread to protect against volatility and blowing through their caps due to being inundated with loan applications. As of March 16, 2020, both Fannie and Freddie increased baseline spreads while Fannie held its 90bp treasury floor and Freddie remained at the greater of 75bps or -15 from the treasury. Freddie SBL increased coupons by 25bps across the board as well.
The uncertainty of the market right now may multifamily property buyers weary, which could create a widening gap between asking prices and bids. This may also lead to a temporary reduction in market liquidity and transaction velocity, potentially leading to price reductions.
The Unknown
The most significant issue is the uncertainty right now. It’s causing an increase in sovereign debt, decreased yield, flight from equities, and pushing out credit spreads. However, this uncertainty will pass and as we become more informed, the panic will be replaced by sensible precaution. That being said, we don’t know exactly what the repercussions of quantitative easing will bring and whether it will be enough to help us through the global economic bottleneck. The 100BP drop from the Fed was likely the last stab to prevent a recession, but what moves will the Fed and U.S. government take if we do slip into a long-term recession?
Final Thoughts
Markets run in cycles and this uncertainty will pass. If you’ve been considering refinancing multifamily or commercial real estate, the rates with mortgage agencies may be higher than they were a couple of months ago and lower with FHA or banks. Or, they may be static. We don’t know for sure how long this situation with Covid-19 will last or the repercussions it may have on capital markets. If you’re thinking about investing in a property but are waiting for a better rate, talk to a variety of different lenders and investment advisers to make the most informed decision. There’s no way to predict at the moment how rates will change in the future. Be responsible, but don’t panic.
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