How will COVID affect multifamily real estate valuation?
According to data provided by the National Multifamily Housing Council's Rent Payment Tracker, across the United States, 84% of tenants paid their rent by April 12th. This compares to 90% the year prior, a 7% decline from March rent. We expect May rent performance will be worse, given limited savings, continued record jobless claims and delays disbursing unemployment benefits and payroll protection loans.
The US is a consumption-driven economy. Consumer spending comprises roughly 70% of GDP. According to Wells Fargo, consumer spending is down 35% at this point compared to same time last year. As you read this and think about your own changes in spending, this probably sounds quite accurate to you.
If consumers don't spend, businesses can't pay employees, tenants can't afford rent. Rent rates either need to be reduced or landlords need to accept lower rent revenue vis-à-vis higher non-payment rates. Other things could happen like employees forced to take pay cuts to keep their jobs, which will have a similar effect. Or we see a material shift from homeownership to renting as people lose their homes which might support rent rates... Lots of different scenarios to consider.
To put it another way, lower rental income results in lower net operating income (NOI) which results in lower valuation.
Insight From The Public Markets
Looking at public markets, Equity Residential (EQR) is down 25%, AvalonBay (AVB) is down 29% from February 21 highs. Income producing properties are valued based on cap rate, so from this perspective we should expect valuations to decline in the near term. This said, the Fed is pumping money into the economy which as we saw in the Great Recession should cause asset values to increase both as means of chasing yield with interest rates near zero and as a hedge against inflation (holding cash is not good in that environment).
We don't see consumer spending snapping back to pre-COVID levels quickly. This will take time as the consumer needs confidence that their health and job is safe before spending on non-necessities, things that bring them out of their homes. We wonder if this economic shock might condition business and consumer spending to be more frugal over a longer time horizon.
We do believe multifamily residential asset valuations will decline in the near term (now through mid-2021), but continue to serve as attractive long-term investments.
That's just our 2 cents, we are not economists but we are data-driven buy-and-hold value investors. What are your thoughts? Are you buying now or are you waiting on the sidelines?
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