I usually begin by discussing acquisitions and/or disposals. I can obviously mention some upgrades and construction. But as for new assets, I can only say that a lot of time was invested in checking properties, financial reports and due diligence: for nothing. And for that I’m grateful…
Early in 2020, the US multifamily market was sizzling and Cap rates in the South East went down to around 5%. Terms were tough, and sellers were wooed. Some pushed the limits when realizing that there was a queue of buyers begging for deals. New York’s big wigs that were hit by the June 2019 regulations were hunting for deals outside NY, US and foreign RE funds were eager to buy, and every landlord in central GA was approached by realtors, RE funds and investors that shopped for yields.
Despite the frustration from fierce competition and the time that was lost, I’m glad that we walked away from deals that looked “good on Excel”. One can take risks with personal funds but must be careful with investors’ money. The options we had then were hard. Obviously, no one should enter a deal that looks bad on paper. But sometimes market conditions are such, that only narrow profit margins are available, and a successful outcome depends on multiple factors. Since conditions frequently change, too many factors may impact the validity of a business plan. Therefore, after due diligence, we gave up on these few projects and a lot of work was lost.
Evaluating properties requires effort. In addition to negotiating commercial terms, there’s money to invest, financial reviews, legal, inspections, tax advisors, property management review and a lot of footwork. When a deal folds, so does a lot of money, effort and goodwill that was invested. It’s no joy and very frustrating.
I’m not proud for aborting those deals, because no one knew then that the market would change. I’m grateful for not compromising and for sticking to our standards. To conclude, in retrospective, this time I’m (somewhat) glad to report that we haven’t acquired any new properties 😊
© Noah's Ark, oil on canvas painting by Edward Hicks, 1846 Philadelphia Museum of Art (1846)
My original idea was to write about Global Warming. It was a hot topic 4 months ago. Actually, the article is now ready. But let’s face it, who thinks about Global Warming these days? Poor Greta Thunberg sadly watches how the buzz she created lost momentum. However, it’s possible that when the plague is over, the connection between Earth and humans will regain awareness with renewed, stronger momentum.
Like many, I now have plenty of time. I’m using it to read articles about the real estate market and how COVID-19 may affect it. I can now give you the bottom line: No one knows and any estimate is just a guess. But there are few known parameters that may influence the outcome and those who can play them well may benefit.
On the one hand, the market is frozen. Buyers are on the sideline to view how things will evolve. Real estate is slow to react but it’s logical to assume that we’re not heading for price hikes. Therefore, investors are in no rush. Sellers would gladly sell at January 2020 prices, but buyers now request a price reduction. So those who are in no rush to buy or sell, either leave the market or play for time. Sellers that need cash quickly will have to lower their price.
The Federal Government and many States quickly enacted new laws to prevent the displacement of tenants. Landlords can’t evict tenants that stopped paying rent due to the pandemic situation. The reasoning was actually to limit the large movement of the population during the pandemic. We can assume that some tenants can’t pay their rent because they were laid off or furloughed. Some may be concerned about their future and decide to keep their rent money even if this means breaking their lease. Early April saw a 15% drop in rent-paying, nationwide. The difficulty in collecting rent and not being able to do anything about it, obviously hurts landlords that counted on this income to pay for their taxes and utilities. To assist with cashflow, many States extended the filing and payment deadline and some municipalities offered relief. The Federal Government has enacted CARES and helps landlords also through SBA-PPP or EIDL grants and loans.
Mortgage is another major expense. The Federal Government injected capital to help banks and agencies increase liquidity. Fannie and Freddie are offering assistance for borrowers in the form of forbearance. This doesn’t mean they forgive payments, they're only postponing it and spreading it over a 12-month period. It helps landlords in the short term but won’t compensate for tenants that stopped paying, or for later lowering the rent since the public would be poorer.
The US economy is anything but fragile. It entered the pandemic in good shape. But even a strong economy needs time to recover. Some employees won’t have a workplace to return to. It will take time for industry in general to reproduce at previous levels. In addition, many sectors like travel, hospitality and retail will face new consumer behavior and specific conditions that would lead to long reorganization.
Professional RE investors are aware of these parameters. The ones that are liquid, patient and fast may acquire properties at significant discounts.Missed loan payments are an indication of the stress that some borrowers are experiencing.
Real Estate is traditionally broken into several large sectors. Most of them will be negatively affected. There’s no need to expand on the Hotel Sector. Retail was in a trouble even before the pandemic. The new situation demonstrates the advantages of online retail over bricks and mortar. Street retailers and malls, especially B and C class, aren’t looking good.
Offices will be affected as well. Contrary to popular belief, I personally don’t think that people will shift to working from home permanently. I believe most people would rather not work from home. Let’s face it, most work from their kitchen… The ones with small children are in chaos and the majority don’t have a home office to work comfortably from. Employers may request employees to work from home, but only for a short time. The Office Sector is vulnerable to economic conditions, and rent will have to be adjusted. Perhaps inexpensive near-home regional office space may become popular.
As for housing, the following parameters should be considered. Real estate is influenced by interest rates, rent, supply and demand. Low interest rates have inflated property prices. However, lenders are reconsidering RE risks and adjusting the spread. Only strong borrowers will benefit from very low rates. Many contractors have been asked to stop working on existing projects. This in turn will impact the supply of new product. Potential single-family or apartment buyers may give up on the idea and rent until things become clearer. We can already see a decrease in home loan applications. As a result, we can anticipate increased demand for rental and low demand for new homes. Therefore, the rental housing market may benefit from high occupancy but won’t be able to increase rent due to renters’ dwindling financial resources.
Connecting the dots: I anticipate that in the short term, we shall witness a moderate reduction in value in multifamily properties and not many transactions. We’ll later see a correction. Will it be in the form of V shape, or U or L? No one knows. The predictions for real estate in general, range from “hold” to “run”. But I believe that once again, multifamily will show strength. Vultures will have to look elsewhere. Like I said, all we can do now is research and guess, because reality doesn’t abide to economic formulas. Only a couple of months ago, who would have guessed that the US economy would move from full employment to record unemployment? Who knew that the streets of NYC would be empty and that airports around the world would shut down? We’re hopeful that science will come up with a vaccine or cure soon, and that the (incompetent) handling of the pandemic in most of the world will end. But we may face a situation where no remedy is available or that a mutation emerges. We may have to adapt to a different world.
Also bear in mind that we try to predict the future based on economic theories. But in radical conditions, Governments tend to intervene in the housing market. Usually in favor of tenants and against landlords. In such event, we can disregard normal predictions. For example, NYC Rent Control was enacted around 100 years ago to help tenants and prevent price hikes. At around the same time, a similar law was legislated by the British Mandate and it was later inherited by the State of Israel (The Tenant Protection Law). Both laws still exist, and both created injustices and inflicted damage to the rental market in both countries, and in exactly the same way. Unfortunately, it’s a fact that any Government forced economic intervention has negative outcomes, even if the original idea meant well.
Despite what many columnists claim, it’s impossible to find comparable scenarios to what we are witnessing now. Those who say it’s like the Black Death only try to scare you. There’s no comparison. Those who compare it to Hurricane Katrina neglect the fact that it was limited and isolated. The ones that mention the Spanish Flu ignore the fact that the world was completely different then, in terms of workspace and globalization, so we can’t draw relevant conclusions from that pandemic. The 1929 Crash is somewhat similar in terms of decline in demand, limitations on global trade and the national isolation that prevailed as a result. But all the Chairmen of all the Central Banks throughout the world took the class on the Great Depression in their first Macro-Economics course at University. They aren’t likely to repeat the same mistakes that aggravated the Great Depression then. Let’s just hope that the current crisis won’t end in the same way... war. There’s a lot of anger in the world right now, and it may be channeled in a wrong way.
We should remain optimistic and remember that every crisis generates new opportunities. Those of us who experienced the 2000 recession and the 2008 collapse know that we need patience, but it will eventually pass and be over.
Happy Passover, Happy Easter and health to everyone. Stay safe!
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