Though there is some erosion in fundamentals, apartments are doing much better than retail. “Things are holding up better than I think most of us would have anticipated,” says Brian Stoffers, global president of Debt and Structured Finance for Capital Markets at CBRE.
But the problems in retail may be catching up to multifamily.
“I think some of those ground floor tenants in mid-rise, mixed-use multifamily are facing problems,” Stoffers says. “There are typically restaurants and service providers that have been more affected by COVID.”
Stoffers also sees some stress in urban areas, particularly in San Francisco in New York.
Others agree. “In the Great Financial Crisis, we saw the opposite of what we see now,” says David Schwartz, Chairman and CEO at Waterton Associates. “The urban markets seemed less impacted. Sun Belt suburban was more impacted, particularly some of the markets that had overbuilding and single-family home construction.”
In this environment, Schwartz says suburbs are performing better than cities. For instance, downtown Denver is experiencing some issues, though its suburbs are doing better.
“Millennial families may have stayed in urban areas for longer, but that [their exodus] was all accelerated,” Schwartz says.
Since the pandemic struck March, most office workers were allowed to telework. In a lot of expensive metros, they’ve decided to pack up and head to the suburbs.
“People are working from home, and they don’t need to walk to work in this environment,” says Schwartz. “They can possibly get more space and maybe lower their rental costs [by moving].”
Softness in urban multifamily shows up in many places, but new lease-ups, which are coming on the market at a bad time, could be most exposed.
“In the data and the market research, suburban and urban new lease-ups around the country are not performing great,” Schwartz says. “You might see more opportunity [to make buys] in that.”
Schwartz will be looking at urban deals because he is still a believer in those markets. “People will still want to walk to work,” he says. “People are still going to go to work, and they will want to be around nightlife.”
But Stoffers sees issues outside of Class A. “Some of the workforce housing has struggled more than some of the white-collar housing because of unemployment,” he says.
Schwartz thinks middle-income housing, which is more impacted by job loss than the upper tiers of housing, could be another place investors target.
“We see some high vacancies, some high delinquencies and some high collection loss,” Schwartz says. “That could create some opportunities,” Schwartz says.
If these middle-income apartment complexes are smaller, there could be even more issues. Noah E. Hochman, Co-Chief Investment Officer and Head of Capital Markets for TruAmerica, thinks any issues will generally occur in smaller properties. “Where people are going to get in trouble is if they’re overleveraged or have very small buildings where not having a few tenants not paying can be very impactful,” he says.