…But buyers Must Be Willing to ‘Wait for it’ to CAPITALIZE on Opportunities

By: Kevin Brinkman, Co-Founder & CEO, Brinkman

As the COVID-19 pandemic continues to unfold, we’re seeing that much like Aaron Burr in Hamilton who had to be patient to seize opportunities in Alexander’s shadow, real estate buyers are going to have to “Wait for It” to realize a decrease in property values and find good buying opportunities. While the virus was quick to have unprecedented implications on our communities, we have yet to see major changes in pricing or a flood of existing supply hitting the market.  From where we stand today, we foresee opportunities arising in the future, but it is apparent that patience is essential in waiting for the right opportunities to surface.

Multi-Family Market Weathers Volatility

With the improbability of COVID showing signs of reduced volatility throughout the remainder of the year, we are looking to asset classes that are historically best suited to weather the unpredictability of this storm. While hospitality, office, and retail are experiencing the most significant setbacks, the multi-family market remains relatively strong and poised to provide quality opportunities once the market loosens.

One of the biggest indicators of the resilience of this product type are the rental metrics. The residential rental market has continued to perform throughout the past five months.  As of late June, a report by Greystar showed Class A collection delinquency at only 3.4% compared to pre-COVID collections at 2%.

Although multi-family data points remain stronger than other asset classes, it has not gone unaffected and will continue to see impacts throughout this year and next.  Predictions by CoStar are estimating vacancies expected to rise by 2.5% through 2021 and net deliveries to outpace absorptions by a factor of 4.

These numbers indicate a pending oversupply in new ground-up development projects.  Knowing this, we anticipate Class A multi-family acquisitions to provide investors with the most valuable opportunities.

Resilience Will Be Awarded by Opportunity

While multi-family deals have slowly been coming online, we expect to see an uptick in opportunities over the next 12 months as multiple market factors converge.

In today’s current real estate landscape, owners are benefiting from the number of stimulus and relief programs supporting Operating Expenses and Revenue.  Whether it be the additional federal funding for unemployment, stimulus checks that allow their tenants to maintain their ability to pay rent, the PPP loans that allow them to continue to disburse their payroll, or the loan deferments they may be receiving from their financial institution, there is enough assistance currently in place for them to maintain property solvency.  As these programs begin to decrease, and go away altogether, this will start creating a downward pressure on assets.

There continues to be a push and pull between properties continuing to perform through the support of stimulus programs and real estate pricing not yet being impacted by the pandemic.  We have yet to see the convergence of overall economic impacts with the elimination of stimulus programs necessary to create the market conditions that would generate more opportunistic multi-family dispositions. Assets currently on the market are still averaging near pre-COVID pricing around $260,000/unit

Even if capital markets remain strong and cap rates don’t change much, we anticipate vacancy rates to rise 2-6% depending on the class of apartments in 2021 which will lead to lower net operating incomes, stronger motivation by owners to dispose of their assets, and more overall acquisitions opportunities. With a potential extension of stimulus programs through the remainder of this year, we anticipate this will start to occur around Q1 of 2021.

Capitalizing on Value

The end of this storm is not yet in sight, but much like Burr, those willing to wait it out will be rewarded for their resiliency. We are committed to finding quality multi-family acquisitions as they surface and capitalizing on the value that they deliver.

Multi-family cap rates for different property types in Denver as well as the national and Denver averages.