Cracks starting to show in U.S. multifamily markets

April collections held steady for some, but others saw a significant drop-off as all brace for May

Dan Michaels, of the Los Angeles-based real estate investment firm Stockdale Capital Partners, had a gut feeling late last year that it was time to launch a commingled distressed debt fund.

Dan Michaels of Stockdale Capital Partners

Prior to January, few knew anything of the novel coronavirus from Wuhan, China. But more than 10 years after weathering the 2008 downturn, the moment seemed right, said Michaels, a managing director at Stockdale.

The new fund went on to close $550 million in commitments from investors, including sovereign wealth funds and public pension plans, in the second week of February. It’s now targeting an 18 percent to 20 percent return on investments in troubled assets, including multifamily properties in several key markets around the country, according to Michaels.

Older rental properties with lower-income tenants are “absolutely going to get hit,” he noted. “And now we’re in a position to play offense.”

While the hospitality and retail sectors have already cratered, after tourism ground to a halt and many stores and restaurants shut their doors amid widespread stay-at-home orders, apartment building owners are beginning to feel the pressure as well.

Data from the FDIC shows there was $458.7 billion in outstanding multifamily loans held by institutions insured by the agency at the end of 2019.

And as U.S. unemployment accelerates — with jobless claims hitting 26 million since the pandemic hit — renters increasingly lack the resources to withstand major income losses, according to Harvard University’s Joint Center for Housing Studies. The report found that the median low-income renter has only $410 left after paying housing costs.

Despite the dismal forecast, a national survey of 11.5 million rental properties showed that 84 percent collected at least some rent in April. But many landlords expect that number to be significantly lower in May, and those with less affluent tenants say they have already taken a hit.

At the same time, the national data does reflect how rent collection can vary widely based on how organized the tenants are and what industries they work in, among other factors. And that’s before assessing each building’s financial underwriting.

A safer bet?

While investors often flock to multifamily properties — given their relative resilience to downturns — no asset class can survive a prolonged economic shutdown unscathed.

When the dust settles after the pandemic, some cities may also rethink their approach to density, economist and NYU Schack Institute of Real Estate dean Sam Chandan said during a recent TRD Talks Live webinar.

Robert Morgenstern of Morgenstern Capital

Robert Morgenstern, of the real estate investment firm Morgenstern Capital, said “there’s no question that multifamily, in the short and medium-term, is going to be a safer bet than retail or hospitality.” But as the country slips deeper into a recession, “even household names are facing distress and will be forced to sell,” he added. “There will be some shakeup — those conversations are absolutely starting.”

On its first-quarter earnings call, Buffalo-based M&T Bank, which has a $36 billion commercial real estate portfolio with $4.2 billion in multifamily loans, reported that the volume of its delinquent loans doubled in the first quarter.

Darren King, M&T’s executive vice president, said the bank’s multifamily clients will be attracted to opportunistic buys as prices move downward. “They see opportunity as much as they see risk,” he said. “They are buyers as much as sellers.”

Chandan, for one, sounded a positive note for the multifamily sector, which he said has stayed relatively stable and is still enjoying “positive market sentiment” overall.

That could give investors a greater appetite for rental properties, especially those with a longer-term strategy, including public pension systems, according to Charles Bendit, co-CEO of the real estate development firm Taconic Investment Partners.

Charles Bendit of Taconic Investment Partners

But that all depends on the size of the fund and its appetite for risk. “We all intuitively know there are going to be opportunities,” said Bendit. “If values go down, and you believe the market will come back after the event, and even exceed those levels, then it’s a good time to be a buyer. But where that will surface, who knows?”

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