The economic downturn that followed the COVID-19 shutdown put unprecedented pressure on two vital, and highly intertwined, pillars of our economy: employment and housing.
Spiking unemployment particularly put disproportionate pressure on rental housing markets. Renters began defaulting on monthly rent payments in record numbers as the crisis dragged on throughout the summer. My home market of Las Vegas was especially hard-hit.
Normally one of the most robust rental markets in the country due to the high numbers of transient workers in entertainment and hospitality that the city attracts, rent defaults are now rapidly rising as a consequence to the countless workers whose shows, venues and performances were cancelled in mid-March as the pandemic hit. Inevitably these economic events will soon impact prices of multifamily investment properties across the country.
Discounted Rental Properties Represent a Buying Opportunity
Throughout the summer, multifamily property prices have held up relatively well. Many cities have an eviction moratorium in place that has protected tenants, while also making it difficult for economists to truly assess what the impact of the pandemic will be on rental markets when the moratorium is lifted. Once that happens, it’s reasonable to expect that with a rise in bankruptcies, rent arrearages and struggling property managers, multifamily housing markets will soon be discounted. The chain of events may deter risk averse investors, especially first-time investors, from dipping their toes into the water. However, there are many reasons to believe that these discounted properties could be a boon of opportunity for the future. In fact, now is the time that not only am I shopping for new acquisitions for my family’s portfolio, but I am advising my investor clients to do the same as well.
Debt Will Remain Cheap in Q4 and 2021
With the Federal Reserve recently pledging to keep interest rates near zero for the foreseeable future, mortgages are going to remain very cheap. Investors will have the ability to finance acquisitions at some of the lowest costs of capital since the financial crisis of 2008, and what we are currently seeing is the following: for low-risk assets like multifamily housing, the appetite from banks to lend on strong assets remains high. Abundant credit availability at such a low cost will give investors a rare opportunity to pick up discounted housing assets and generate larger profit margins on future rental income thanks to cheap financing. As rental occupancy rates normalize in 2021 and beyond, profit margins will continue to climb.
Rental Markets Will Become Strong Again
This year has been a roller coaster for multifamily properties as we saw record numbers of tenants default and many others move out of urban rental markets in favor of suburban or rural homes to escape the pandemic. While all economic recoveries take some time to play out, urban rental housing will continue to play an important role well into the future. As the effects of the pandemic wane, I believe that rental occupancy will steadily gain in 2021 and beyond as many people return to the city for economic opportunity. With the economy slowly recovering we will start to see city renters return here in Las Vegas as the conventions, concerts and hospitality industry makes its comeback.
This will give new multifamily investors who entered assets at much lower price points an opportunity for significant upside as they pay down cheap debt with smaller principals.
In particular, I believe investors should be paying close attention to tightly knit urban markets that offer residents a lower cost of living along with some of the pandemic-era perks that will likely become a permanent fixture of our lifestyle (lots of outdoor space, opportunities to get into nature, pet-friendly buildings etc). Cities like Las Vegas, Austin, Phoenix and Denver all come to mind.
Lisa Song Sutton founded Sin City Cupcakes nearly 8 years ago, and today it is an iconic Las Vegas treat that delights tens of thousands of locals and visitors each year. Lisa is also co-founder of Ship Las Vegas, Elite Homes - Christie’s International Real Estate, and Liquid & Lace swimwear. Lisa is actively involved in the community, previously serving on non-profit boards including Monday’s Dark and the Asian Community Development Council.
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