(Photo | Courtesy of Compass Commercial Real Estate Services)
The world has changed dramatically in the last four months. No one anticipated or planned for the COVID-19 pandemic.
We at Compass Commercial Real Estate are asked on a regular basis how this has impacted the local real estate market and, more specifically, the local multifamily real estate market. There are no shortages of opinions on the subject. Our inboxes fill with webinars, newsletters, news flashes and other thoughts of how this crisis is impacting various markets. The opinions are diverse and changing as the situation continues to develop.
So far, measurable impacts are minimal, but we are early in the game. So here is some perspective.
Leading up to March of 2020, the local multifamily market was vigorous and healthy. Vacancy rates for the last few years were running between two and four percent. Rents had steadily increased, but the rates of increase had leveled off more recently. New construction was robust, but not seeming to cause oversupply, as new deliveries were readily absorbed. Buyer demand was extremely high, with very few owners willing to sell. Property valuations had risen steadily and consistently. The dark clouds were rent control and other government interventions.
From a real estate perspective, we are very early in assessing the impacts of COVID-19. With real estate trends being more long-term, markets could be impacted for months or even years to come. But what has changed so far?
- There is uncertainty about the tenant’s ability to pay rent. It appears the nonpayment of rent is only elevated slightly from pre-COVID-19. When government stimulus programs run out, this may become more of an issue.
- Tours and inspections of occupied units pose a challenge during transactions. Buyers ability to inspect may be somewhat compromised.
- There is great concern about increased government intervention.
What has not changed?
- Vacancy rates are holding steady.
- New construction is continuing, at least as it applies to those projects already in the pipeline.
- Investor demand continues to be strong.
- Sellers are still in short supply.
The longer-term impacts are still very uncertain. It would seem there may be some softening in both valuations and rental rates. Thus far, there is no evidence of that.
Will the COVID-19 recession result in increasing vacancy and delinquency rates and a corresponding softening of rental rates? Will we see a market pricing correction? There is still strong investor demand. Multifamily continues to be a favored asset class. If for sale inventory continues to be scarce, then this correction may not happen. Please let us know what you are experiencing and or expecting.
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