As the economic situation continues to present myriad challenges, working-class Americans in particular have been hit hard by a shortage of employment and housing options. As a result, there has been an increased focus on providing support to at-risk demographics and investing in existing and re-developed multifamily properties which cater to the backbone of American industry.
With Jerome Powell declaring that the economy may need more help from Congress and the central bank earlier this month, the U.S. government is expected to continue delivering financial aid at an unprecedented level. By providing monetary support for people who have lost their jobs and forgivable loans for small businesses that manage to retain their employees, the government is focused on creating a stopgap that protects businesses and consumers long enough for everyone to safely ride out the pandemic.
Given these conditions, below are our suggestions on what investors should look for.
1. Invest in existing hard assets which directly service a long-term trend or growing demographic
The COVID-19 epidemic is exacerbating America’s ongoing housing crisis, and in this environment financially challenged households tend to downsize their residences. This trend goes hand in hand with shifting job market conditions. As an example, companies such as Instacart, Amazon and Walmart have collectively listed more than 700,000 full-time and contract job posts on LinkedIn even as the overall economy continues to shed millions of jobs.
Moreover, larger companies are better positioned to survive the current pandemic compared to their smaller competitors due to their relationships with government institutions and/or better access to capital. This period of economic consolidation is disrupting the financial footing of an increasing number of working class American households.
As a result, the tenant class as a whole is shifting down the totem pole of residential rentals, and there is an increasing backlog of demand for affordable housing across the U.S.
Investing in price-accessible multifamily housing can therefore be a viable option in light of the underlying macro trends facing the market, particularly given that housing subcategories such as Section 8 Housing are directly subsidized by local government entities, which provides a financial buffer for tenants and investors alike. And with significant delays in multifamily construction, the U.S. housing supply is not expected to fully meet the nation’s growing demand anytime soon.
2. When working towards long-term total returns in real estate, we encourage investors to primarily focus on local submarket conditions
According to a recently published study by Yardi Matrix, multifamily rent growth across the U.S. had generally stabilized across the U.S. by the end of 2019. However, more than half of all the 298,000 multifamily units delivered last year were in the Southeast or West regions, and total completions fell 10.9% in 2019 due to labor shortages and delays by local jurisdictions.
With local housing demand completely overhauled as a result of COVID-19, many regions of the U.S. are now faced with acute housing shortages which local governments were unable to adequately plan for.
As a result, many real estate investors are looking for opportunities in markets which have a substantial difference between the projected housing demand prior to COVID-19 which shaped their policies and completion schedules, and the outsized demand volume they are currently facing.
Given local condition variances in prior real estate conditions as well as COVID-19 impact and response, there is no one-size-fit-all policy when it comes to evaluating new investment opportunities. As a result, it’s crucial for investors to take a more zoomed-in approach when looking for opportunities which have a reliable long-term rent growth and potential appreciation under the current economic conditions. The ability to identify these more promising markets will in turn be largely based on the industry resilience and population growth of the underlying submarkets.
3. When choosing an asset, look for an experienced sponsor and a management company with boots on the ground and a finger on their community’s pulse
Given the multilateral nature of real estate projects, it’s important to understand who’s behind every deal. And under today’s uncertain investment climate, it’s especially crucial to work with sponsors which have extensive local experience and the ability to accurately identify underserved community needs.
When information is available, details on past sponsor projects in your target market can serve as an effective proxy for how new deals may play out. For instance, during our recent capital raise for a multifamily portfolio in South Chicago, our analysts benchmarked the performance data for a similar project with the same sponsor just two miles from the current portfolio to serve as a barometer for viability. While past performance is not indicative of future results, the fact that this previous project achieved a 96.6% rent collection rate and 95.3% occupancy rate as of April 30th underscores our confidence in this local sponsor even under today’s challenging economic climate. These metrics in turn have boosted investor confidence in the underlying fundamentals of our latest South Chicago deal.
Every evaluation of a potential real estate deal involves a parallel assessment of the project sponsor, what they’re responsible for and how they plan to execute on the project’s business plan.
As a passive LP investor, your involvement is fairly limited after you’ve made your decision to invest, and therefore it’s important to have a full understanding of a sponsor’s operational effectiveness, risk mitigation plans and reporting requirements and frequency.
While the big picture is important, your investment decisions should be driven by local factors
With persistent challenges in the U.S. job market and a lack of strong economic incentives for new home construction, the market for second-hand and re-developed multifamily properties is increasingly in focus. While the nation is slowly but surely beginning to heal, economic recovery will unfold unevenly across the U.S. Therefore, as a commercial real estate investor, you should ensure that the opportunities you’re considering are timely and aligned with current submarket conditions, particularly during periods of prolonged uncertainty.
As always, iintoo’s team of Licensed Investment Specialists are available to discuss your investment goals and share industry insights. To learn more, feel free to explore our current offerings here.