When the Coronavirus was first identified and people across the US were required to stay home, there were concerns about how this would affect the housing market. What has happened to the multifamily market, and how has it compared to other asset classes in the country?
Fears Around Multifamily Homes and Coronavirus
When the call to stay home went into effect, this made many developers and landlords nervous. If people were being furloughed or laid off from their jobs, there was a fear that many of them were going to be unable to make mortgage and rent payments. As the situation is so unprecedented in modern times, no one was sure how this was going to play out.
The Effect of Coronavirus on The Multifamily Market
So far, there doesn’t actually seem to be much of a dip in rental payments over the course of the lock down. In April, 84% of renters managed to pay all or part of their rent by the 12th of the month. This is much more than some were predicting, even as many were losing income. In fact, the amount renters making payments is on average the same as this time last year.
This is encouraging news for those in the industry, as it shows that payments are still being made even as the situation is still uncertain. As payments are being processed, multifamily homes are seen as one of the most stable markets right now.
The Effect on The Purchase Market
What is the consensus opinion on how the Coronavirus will affect the purchase market? This is where it appears to be having an impact. Many are finding that with the virus still present, they cannot access the funding to buy their own home so they will need to continue to rent.
This has caused major problems for buyers, because as of now, there is no indication of when the virus will be totally under control. Until then, lenders are placing stricter guidelines on who they can lend too, and how much they can lend out. This will keep them safe for the time being but will tarnish the short-term market. You can expect to see a downturn in profits from mortgage lenders.
It’s not surprising to see that multifamily markets are mostly stable, despite what was predicted. With it being much harder to now buy property, renters are staying put where they are. As the virus stabilizes, they’ll need to stay where they are and wait for lenders to be more willing to help them buy property again.
There’s no denying that people across the US are facing a housing crisis. As a renter, you may well find yourself paying 30% or more of your income just to keep a roof above your head. If you’re looking to buy a home, you’ll see that house prices are rising at twice the rate of wage growth. Just how bad is the housing crisis, and what can be done about it?
Buying Vs. Renting
Ask any renter, and they will tell you that they would love to own their own home someday. The problem is that it’s almost impossible for them to afford a home. In recent studies, a person working 40 hours a week at minimum wage cannot afford a two bedroom home anywhere in the country.
This causes problems, as affordable housing currently favors buyers over renters. You can see this in tax deductions, as they essentially subsidize middle- and upper-class homes, rather than affordable homes. It’s taken the ability to afford a home out of reach of millions of people in the country.
It’s not just the cost of buying housing that has gone up. To build those homes, the cost of materials has gone up too. Right now, lumber alone makes up 5 to 10% of the cost of building a home. With these costs rising, it’s getting harder to build affordable housing.
Restrictive Zoning Laws
Zoning laws have created a lot of problems for those trying to create affordable housing. In some areas, such as Los Angeles and San Francisco, put limits on what can be built. These can include limits on how high buildings can go, requiring a certain amount of parking spaces, and so on. These limits have come into place and have restricted developers in their opportunities to create new housing.
What Can Be Done?
There are certainly ways in which the housing crisis can be turned around. Inclusionary zoning laws have been brought into places like New York, allowing for more affordable housing to be built. With more existing properties being turned into affordable housing, this will increase demand too. With around 7.2 million affordable homes being needed across the US, it remains to be seen whether this will help with demand.
It’s clear that many factors have lead to the US housing crisis. If changes are made in how affordable housing is built though, these problems can be mitigated.
In recent years, affordable housing has become a key issue across the US. More and more people are looking to live in urban areas, so more housing is needed. With wages stagnating and the cost of living rising, finding the right housing is becoming much more difficult.
There are many developers who are looking to transform older buildings into affordable housing, and this brings a lot of benefits. As the homes are built into existing buildings, they’re much cheaper to develop. They don’t require planning and building from the ground up, and they can be completed much quicker. Here’s how you can do this too with an existing apartment community.
Depending on your location in the country, you may be eligible for grants and loans to help you achieve this goal. For example, in Denver, Colorado, a $10 billion Revolving Affordable Housing Loan Fund has been launched. This gives developers access to funds they didn’t have before, so they can revitalize older buildings.
Maintaining Historic Status
The great thing about revitalizing older buildings is that they get to stay in the community, rather than being destroyed to make way for new homes. Buildings like older churches and schools are commonly turned into housing, giving them new purpose. If you do this, you’ll need to be sure that you’re maintaining and preserving the historic nature of the site as you convert it.
A Modern Equivalent to Single Room Occupancy
Single room occupancy homes were popular in the past, but restrictions on building them have made these homes much harder to come by. Converting existing apartment buildings into something similar means the concept is coming back, in a new and modern way. Buildings are adapted to suit modern building codes, and the people in the community have access to affordable housing.
Benefits of Converting Apartments
There are so many benefits to adapting an existing building, such as apartments, into affordable housing. It’s a boon to the community, as the housing is available faster, and gives them a great option for lower income housing. For you as the developer, you’ll see there’s lots of incentives and opportunities to build in your city.
Converting an older building into affordable housing is easier than you’d think and makes a lot of sense. You can get funding for it, so you can create housing that the community needs.
There is no denying that Multifamily Investments will pay off in the long run. As they offer steady payments over time, you’ll seen that return sooner rather than later. If you want to diversify your investments though, what else should you be looking into?
The Benefits of Multifamily Investments
There are so many reasons why people choose to invest in multifamily properties. As they’re designed to keep every tenant under the same roof. You’ll only be dealing with that one roof if there’s a leak or reseeding the one lawn. Having only one property to manage is a cost savings and time saver.
Many like investing in multi-family units as it’s quite simple to find tenants. It’ll rarely be vacant, so you’ll be seeing that return on investment regularly. As it’s a multifamily property too, even if one unit is vacant others will be full, so you’ll still see a consistent cash flow.
Other Comparable Investments
If you’re already running a multifamily building, or you want to invest in something slightly different, what should you be looking into? Here are some ideas
Vacation homes: This works well if you live in an area that’s a tourist hot spot. You can buy a property and rent it out as a vacation home for those visiting the area. You’ll get the same benefits as you would with regular tenants, and you’ll be able to make good money from a few short-term tenants. However, you do need to keep the home in impeccable condition. You’ll also find there may be a downturn in tenants, if there’s a slow tourism season in the area.
Commercial property: This is a more expensive prospect than multifamily buildings, so if you want to go into commercial property, you’ll probably need a partner to work with. You can reap the rewards of this though, as you’ll see higher rents from businesses, and they’ll often want to sign on for longer periods.
Land: As the saying goes, you should buy land as they aren’t making more of it. If you buy land in an area that is in high demand, you can make the most of it. You have options: build property, rent it out, or sell it on for a profit. Be aware that if it’s not in the right location though, you won’t see the return you might be expecting.
These three investments can all help you diversify your portfolio. If you have one multifamily building now, try looking into one of these options for your next purchase.
“Location, location, location.” This cliché is often used throughout the world of real estate, often in relation to where the best investments are. New investors sometimes believe that investing in the primary markets in cities like New York, Boston, Los Angeles, etc. will provide the best security and returns.
However, there’s strong evidence to suggest that the middle-market is a better area of investment. Secondary and tertiary markets come with more affordable financing, and competitive vacancy rates to create stable returns.
Learn about the differences between the markets and the benefits of investing in primary or tertiary opportunities.
Defining Primary, Secondary, and Tertiary Markets
While there’s no one real rule regarding the definition, there are some guidelines to help conceptualize how the market is segmented.
- A primary market typically has more than five million residents. Take New York City as an example.
- A secondary market typically ranges from two million to five million residents.
- A tertiary market is typically classified as having fewer than two million residents.
The Benefits of Investing in Tertiary and Secondary Markets
Primary markets are expensive and can come with a high level of risk. Capitalization and vacancies need to be considered. Many investors find that the middle-market has more potential.
Vacancy rates in primary markets are less compelling and remain largely static. Los Angeles, for example, has hit a rate as high as 9.2% over the past two years.
Secondary and tertiary markets outside of metropolitan areas have a higher chance of appreciation in the long term. Take cities like Phoenix and Las Vegas, both of which are tertiary markets, where year over year rent growth is currently tracking close to 5%. In Boston and Los Angeles, growth is less than the national average of 2.6%. Similar figures can be found in other primary markets. Regulation plays a part. Primary markets are more likely to have legislated rent control, which can limit income growth for investors.
Job growth should also be taken into account. Industry expansion, particularly in the tech sector, has been most active in middle-market cities. Office rent growth in cities with high tech expansion has increased at a rate of up to 12% in the last two years. Job growth can lead to lower vacancy rates for commercial investment properties. America’s economy is currently in its longest-ever period of expansion, and a lot of this growth is found in middle-market cities and municipalities.
For first time investors and even experienced investors, the secondary and tertiary markets represent a strong opportunity in 2020. From office properties to multi-family homes, these are the investments that are primed for growth.
META: Understand the differences between primary, secondary, and tertiary markets, and see why the middle-market investment opportunities are more promising today.
On March 15, 2020, the Federal Reserve announced that it was cutting its benchmark interest rate to 0%. The decision was made as the government moves to offset the economic fallout caused by the novel Coronavirus and its spread in the United States.
Goldman Sachs has estimated that the economy could contract by 24% in the second quarter. In the current quarter, the decline is estimated close to 5%.
Anyone wanting to understand the relationship between Federal interest rate policy and recessions will gain some important insights from the following data.
A Modern History of America’s Recessions
The first major shock to the world economy after World War II was the 1973 -1975 Recession. This affected America and most of the developed world.
During this recession, the Federal Reserve was highly active, and rates were higher than we are used to today. In August of 1974, with the recession in full swing, the Federal Funds Rate was as high as 12.35%. It had been climbing from a rate of 9.83% at the beginning of that year. The Fed began to drop the rate, having it fall as low as 4.93% in May 1975. In this case, we see that the rate was climbing ahead of the recession, before peaking and declining to support economic growth.
The next major shock was the 2008 Great Recession. It followed the stock market’s all-time peak in 2007.
In September 2007, The Federal Funds Rate was sitting at 5.25%, an increase from 4.96% at the start of that year. The Fed began to drop the rate in response to economic decline. By the end of 2008, it was sitting at 0.1%. The recession peaked in 2009, but rates increased slowly. The Federal Funds Rate didn’t break 1% until 2017.
What Parallels Can We Draw to the Situation Today?
In modern history, rates have decreased during recessions, but not in the leadup. The Fed is mostly responsive. It reacts to market conditions and lowers rates to incentivize borrowing and spending.
Today’s situation is unique. Until last week, the Fed had been cautiously lowering the rate to prolong a sustained period of economic expansion. It now has little leverage, and economies of major cities and the entire state of California have effectively shut down.
This will be a moment in history not only for how the world deals with a viral pandemic but also for how quickly the economy can bounce back. Today’s rate may shorten the length of economic decline. Unfortunately, the wildcard of the ongoing health crisis makes it impossible to predict the duration or severity of what will happen in the coming months.