Post-COVID future in real estate looks bright
What a year we’ve just experienced. As friends, family and nearly every holiday commercial has rightfully declared, everyone is excited for the New Year.
So how do we think 2021 will fare? Before we start, let’s do a quick recap of 2020 (apologies in advance). The year started strong — sentiment was high, multifamily investors were bullish and very few doubted transaction volume would slow year-over-year and then bam! COVID-19 blindsided the U.S. economy and nearly everything in our world stopped.
Deals died, some on the day of closing, buyers and sellers retreated, and everyone was looking for answers.
The decrease in activity was extraordinary and like the stock market at the time, unprecedented. From mid-March through May everyone was trying to determine the impact of COVID. How high will unemployment go? Will tenants stop paying rent? Have apartment values plummeted?
As the year progressed, however, calm and confidence returned and most in the apartment brokerage business were quite busy making up for lost time. All summer and fall our suburban team was busy with several listings, all generating 10-plus tours, and many selling within 5 percent of our proposed list price, if not less. In fact, Essex completed $40,000,000 in sales in December and 2020 was a Top 5 year in sales volume.
As we prepare for 2021 and talk to several market participants (buyers, sellers, lenders, etc.), many sense that 2021 will be a robust year. For a variety of reasons, a perfect storm is brewing for the multifamily market. While there are several positive trends, I would like to highlight what I believe to be the top three: a low interest rate environment; supply/demand; and “leasing lag.”
In March 2020 the Federal Reserve lowered its greatest instrument — the Federal Funds Rate — to 0.25 percent in an effort to counter COVID’s shock to the economy. It is expected the Fed will keep this rate low for the next 12-18 months.
This action creates more demand for Treasuries and thus lowers interest rates, which directly influences loan pricing. Multifamily continues to be the darling asset for lenders, and the debt markets remain favorable for apartments, with most buyers obtaining rates in the 3.5-4 percent range. If they seek Freddie Mac or Fannie Mae financing, rates can be lower.
For the last several years the demand for multifamily properties has far outweighed the supply, creating an imbalance that has bolstered values. I believe several owners considered selling in early 2020 but once COVID hit, they pulled back. If these owners decide to sell in 2021, the supply of opportunities will surely increase and while it likely won’t meet demand, it will certainly lead to an increase in transaction volume. I suspect apartment demand will not diminish and remain at, or better than, pre-COVID levels.
Lastly, since COVID hit just as the spring leasing started, several renters who were intending to move decided to stay put. If these renters become comfortable with the idea of moving again, we could see a very strong 2021 leasing season. Furthermore, many companies halted hiring, specifically for college graduates. If the pace of hiring increases, so will the demand for apartments as this cohort of the population tends to rent.
Most apartment owners did not increase rents in 2020, instead were more concerned with maintaining strong occupancy. If renter demand increases, apartment owners may have the ability to keep rents on par with inflation, which since 2010, has averaged 2 percent annually.
While the outlook is positive, a lot of this year’s excitement hinges on our progress with COVID. The winter will be tough, but many believe greener pastures are near. Fortunately for us, most apartment investors play the long game. As brokers, we’ve hit the ground running and are excited for the year’s prospects. We hope you are too. Best of luck in 2021.
• Brian Karmowski is a director at Essex Realty Group.
Since 1990, Essex Realty Group, Inc. has served Chicago’s investment real estate market as a top multifamily real estate brokerage firm. Contact us to learn more about our recent Chicagoland multifamily and mixed-use property sales and talk to a Chicago multifamily broker today.Read Full Article at Daily Herald