Although 2020 was a period of adjustments during a pandemic for all industries, hesitant lenders and equity investors have been keeping their eyes wide open on multifamily as one of the more sustainable property types.
As we recover in 2021, the pile of cash sitting on the sidelines should begin to flow, and multifamily will be one of the main recipients of that capital, followed by industrial. For now, multifamily will be beset by some of the challenges impacting commercial real estate in general. Here are the major trends that will influence the capital markets in 2021:
1. INCREASED MULTIFAMILY
Construction loans in the multifamily space have seen increased popularity during the pandemic and will likely continue to attract lenders from all points of the capital industry. Along with industrial, multifamily has been a top-performing property type for rent collections and investment volume.
CBRE Research predicts U.S. multifamily investment volume will reach up to $148 billion next year, which would be a 33% gain over the 2020 estimate of $111 billion.
Banks have capped around 50% of cost during the pandemic. This has left capital providers with other opportunities.
2. CMBS FINDS COMFORT ZONES
Commercial mortgage-backed securities have been very stressed in 2020 but will do better in 2021 as investor demand continues to return. Because of the demand in investors and lower spreads, CMBS should pick up market share on product that is desired by investors, such as industrial, multifamily, long-term leased office, grocery or low-leveraged leased retail and conservative hotels.
Investors in commercial real estate and CMBS will bounce back to stability by focusing efforts on businesses that are reliant on travel and group congregation (mainly lodging and regional malls in commercial real estate).
There is a growing opportunity for collateral in multifamily, industrial, office, self storage and some lockdown-resistant retail that could be comfortably underwritten into CMBS deals.
3. ASSISTANCE FOR RECOVERY
How developers and property owners get to the other side of the pandemic will depend on their ability to stay afloat, and many will rely on the rescue capital being raised to profit from the disruption in the hotel and retail markets.
There has been an immense amount of money raised to invest in distressed propteries and that can be invested through purchasing distressed loans or buying foreclosed properties by putting preferred equity in place if the current property owner just needs a slug of cash to sort of getting through the pandemic.
Distressed buying and lending has gained traction during this first quarter and is expected to pick up in the second quarter of 2021. Banks and funds are throwing the towel on forbearance agreements with borrowers and selling the loans.
Bridge lending will account for a lot of the distress and rescue investing. There’s going to be a massive amount of bridge lending for distressed assets about to come online heavily coming from retail and hotels.
4. CAPITAL GALORE
Unlike the Great Recession, which was devoid of capital, this market is awash in both equity and debt seeking yield.
Not only are multifamily rates in the historically low territory but lenders are also seeking industrial opportunities, though spec development is more conservative and will have a greater equity requirement. Refinancing stabilized industrial is as attractive as it’s ever been.
Just behind multifamily and industrial, lenders have shown a new appreciation for suburban office. Locations that may have been on the chopping block are now keepers.
Many tenants with leases up for renewal are rotating into their suburban locations.
5. URBAN - SUBURBAN SHIFT
The pandemic has taught us that many jobs can be done remotely. The suburban office is expected to recover faster than urban office following the mass exodus from some of the major cities to the suburbs.
The young adults who relocated back to live with their parents to save money are more likely to move back into the cities once the offices reopen. They want to get back to a social setting and make in person connections to push them ahead in the game. Recruiters will use this strategy to attract new talent especially towards the Gen Z age group. Millennials are reaching the point in their life where urban living is loosing its glamour and often traded in for larger housing options in less-dense submarkets.
6. HIGHER RESERVES
Based on a more conservative analysis of rent growth and lease-up periods, the amount of time borrowers need to sock away carry costs until their properties are cash-flowing will generally be higher than before the pandemic.
The increase, however, can be substantial—a reserve that might have been 18 months before the pandemic could now be 20 months, 24 months or even 30 months, depending on the situation.
7. PRICE DISCOVERY
There will be greater price discovery in 2021, but it will be uneven. Multifamily, industrial and some of the more specialized property types—like self storage and data centers—have gotten a lift from the pandemic. Retail and hotel assets, on the other hand, will need to brace themselves for a longer recovery.
Retail rents will see long-term changes, and in places like New York City are likely to be completely repriced. Hotels, another casualty of lockdowns, are being repurposed to multifamily in states like Texas and Florida but won’t be rescued so easily in instances where zoning and/or unions prevent such conversions.
Even if the prices come in low initially, those prices will likely recover pretty quickly because there’s a lot of equity on the sidelines to buy.
8. WAREHOUSE LENDING
Given the extreme uncertainty and exposure to nonperforming property types like hotel and retail, many banks pulled back on their warehouse lending—credit lines that are extended to borrowers and then sold on the secondary market either directly or via securitization. But lenders are expected to reinvigorate their warehouse businesses.
While banks will come through the pandemic seeing a good performance to their last dollar in their warehouse lending, borrowers may not see a full recovery.
Learn more about how Private Client Investments, Inc can help you in 2021.