Thoughts on the 2021 Multifamily MarketMar 23, 2021
Here are some general thoughts about the real estate investment market. Specifically in the FIG multifamily context, of course. We're talking about build-to-rent multifamily in the Intermountain West—Utah, Arizona, Idaho—and in parts of Texas.
While those states obviously make up a huge market, this will be a little bit of a hyper-specific summary on those markets. The US has over 400 different metros with all kinds of asset classes within real estate investing. My thoughts will be more grounded within residential multifamily (duplexes, triplexes, and fourplexes).
You can't talk about 2021 without talking about 2020 first! I remember I was on a beautiful vacation in early March of 2020. Everything was wonderful until I came back and 8 days later, the world was in lockdown. Now we're here in 2021 and things seem to be getting better.
If I can focus this conversation on one single word in 2021, and what I want to see how everything goes with respect to this, it's "inflation". The market had such a dramatic slowdown of economic activity in 2020, but now we've got a bunch of vaccinations happening... most places in America are seeing a declining number of cases.
We're all tired of the pandemic, right? The general consensus seems to be that we're on the road to things getting a lot better. People may argue about when exactly that is and how that happens, but much of that will be hyper-local.
Here in Utah people are still wearing masks, but things have been relatively open. It's my opinion that as states that were more locked-down return to the economy in full force. This will lead to some kind of inflation.
Inflation is when more dollars chase a limited amount of goods. And it's been bad during COVID. Housing prices, rents, materials, etc. have gone up. In response to this, our team has been watching both inflation and affordability.
We can build fourplexes and we can build rental housing, and we have to provide a return for real estate investors that they like. Our projects have to remain something that you're excited to invest in.
How long can we push costs off onto tenants? How much more can they pay? Well, with inflation and stimulus we just don't know. The job market has been better than anybody could have hoped during COVID-19. Granted there have been bad things about it, but I think the general consensus is that it has not been as bad as any of us thought.
- What does returning to a fully open economy look like?
- How does it impact build-to-rent investing?
- What does it do to loans?
We're watching Fannie Mae talk a lot about restricting the amount of investor loans that they'll allow. This probably means higher interest rates for investors at some point. Then again, people still need a place to live, they still need a place to rent.
I also watch to see if Fannie Mae is trying to scale back the number of investor loans that they allow. What's the private sector going to do about that? Is somebody's going to do more mortgage-backed securities catered towards investors and or second homes?
There's a lot I'm watching for in 2021. As we return to a more open economy, the job market should improve. I think that the outlook is good for investors that make smart long-term decisions. However, I don't think you can expect the same interest rates that we've been having a party with for the last 18 months.
Foreclosures and Eviction Moratoriums
We get questions a lot about foreclosure and eviction moratoriums. Everybody's really nervous about that. One thing that happens a lot around here is we'll get a call from an investor in San Francisco and they'll say, "Hey, what's rent control, like in Utah? What's rent control, like in Texas?" And we laugh and say, "what's that?!"
We've kind of looked down our nose at that policy, but whenever the federal government comes in and issues a nationwide eviction or foreclosure moratorium, that becomes a bit of a problem.
Can they even do that? The federal government itself cannot but Fannie Mae (loans that are backed by the government) can put restrictions on investors saying you can't foreclose "because we hold the paper on your loan". States and local municipalities can say they're not going to allow evictions for a certain period of time. We've even heard horror stories of certain markets where the sheriff just won't cooperate with an eviction because he just doesn't feel like it's the right thing right now...
What we've predominantly seen during the covid-19 pandemic when it comes to foreclosures for investors is that it's going to hurt your credit. If you call asking for a forbearance on your investment property, they'll probably give it to you, but they're going to come looking for that money at some point and your credit may get dinged. We've had a few investors whose refinances faltered as a result.
What happens to evictions? That has turned out to be something that investors have been more afraid of than they really needed to be—at least in the markets that FIG operates in. We hear about these big sweeping eviction moratoriums. Usually, a good competent property manager digs into the fine print of what those really say. More often than not, those have been set aside and allocated for tenants that have truly had an immediate impact of COVID-19 in their lives. For example, "I lost my job this month because I work in the hotel industry, and I'm trying to find a new one"... You're gonna have to give that tenant some more time. Or... "I have COVID-19, or people in my household have COVID-19. If you put us out on the street, we're going to be around spreading it to everybody. We can't shelter in place." That's mostly the fine print in the in our markets.
If somebody says "I can't make my rent." and there's a moratorium. The question is: why can't you make your rent? Often, if a tenant comes forward and says "I don't have enough money here and I lost my job, but it wasn't COVID-19 related." Those evictions, although they're generally a little bit clogged up in the court system, are allowed to proceed.
Overall, FIG hasn't had too much trouble. We've actually been pleasantly surprised by how well the rents have held up. When you look at shelter and place and stay-at-home orders—the value of where you live has been enhanced. People really worked hard and sacrificed to be able to keep their rent current.
In many instances where they couldn't do it, the property management team we work with has done a good job at temporary forbearance: "Well, what can you pay and when can you" and working through that. At the beginning of the pandemic, this was a problem that we all shared together. Our team has been pretty good at working through all of that.
In summary, this has been a boogeyman that has not been nearly as big as we originally thought. We're crossing our fingers, hoping that this continues to be the case. As we see vaccinations and economies reopen, we're inclined to think we've seen the worst of it. And we hope that continues to be the case.