Multifamily Posed for a Reversal in Fortune

The end to supplemental payments and a rising number of Covid-19 infections could knock multifamily down a few notches.


So far the multifamily asset class has fared well during the pandemic, with the vast majority of renters staying on top of their monthly obligations. In addition, the capital markets for apartments have remained open for business during this time.


However a set of unfortunate factors are coalescing to create what Ivan Kaufman, CEO of Arbor Realty Trust, says will be the perfect storm for multifamily. These include the expected end to the supplemental unemployment payments this month and the recent surge in Covid-19 infections across the US that could keep businesses closed for longer than anticipated, he says.


Arbor Realty Trust provides financing for the multifamily asset class with a heavy emphasis on workforce housing. It has had, in other words, a front row seat to the unfolding developments from the novel coronavirus. Without a doubt, Kaufman tells, as an asset class multifamily has performed remarkably well to date. Much of that has been due to the CARES Act and its supplemental unemployment payments, which have been credited to keeping rent payments as high as they have been, he says. “Lenders like us and property operators haven’t felt the impact of the employment losses created by Covid-19 to date,” he explains. “The supplemental payments have put people in as good, if not better, positions than when they were working.”


But those $600 weekly payments are scheduled to sunset at the end of the month and there is little consensus on Capitol Hill for further relief. At the same time, with the rising cases, fewer people will be returning to work than originally expecting as some businesses stay shuttered or reverse course and close again. Then, Kaufman says, there is the question about whether schools will reopen in the fall, which could make returning to work, or searching for a job, that much harder.


Falling Metrics

So far there has been an occupancy drop of two-to-five percentage points in multifamily, Kaufman says. “This was not a lot—many were expected 10-to-15 points.”  Arbor Realty predicts that with the upcoming downturn for the asset class, occupancy rates will drop another five-to-seven points.


“We also predict a rental decline of 3%, which is significant,” he says. “That compares with a 3-5% rent growth every year of the last ten years. That is what we are underwriting now, as well as the drop in occupancy.”


Some Positives

Kaufman’s outlook is not uniformly gloomy. He says there will continue to be great demand for multifamily assets, fueled in no small part by the very low interest rates.


Also, multifamily didn’t experience a dislocation in liquidity, he adds. “Almost every other asset class had one for a few months. We benefit from Fannie Mae and Freddie Mac, whose mandate is to provide liquidity. They never missed a beat. That is significant because they provide consistency for people.”