In a V-Shaped or Swoosh-Shaped Recovery, Look to Rental Housing


Fabio Baum, Managing Director

The real estate industry has seen its ups and downs since the COVID-19 pandemic forced us all to stay home and rethink our investment goals and our daily routines. Real estate capital markets froze in the second quarter of 2020 with the beginning of the shelter-in-place orders, but are now showing some signs of recovery. Our firm also took a pause in March, but resumed closing new construction loans in July. The confidence comes from the long-term view we take on our preferred multifamily asset types and markets targeted.


So while it is recognized that consumer spending, unemployment and housing demand will likely continue to shift throughout this period of correction and realignment, the one thing that remains true is the ongoing need for housing, especially in key markets with job and population growth. As such, today we feel it is pretty much business as usual while taking into account logic, data and economic realities.


Having a long-term view when it comes to the value of rental housing has served the entire industry well. This trend has been clearly evident over the last 20 years, as shown in the chart below provided in the (pre-COVID-19) 2020 Freddie Mac multifamily outlook. Cap rates have continued their downward march while values, namely driven by rent growth, continue to climb.


Surely if you made your equity bet in August 2007 when the price index peaked, you would have had to wait until March 2013 to recover your equity value. However, the drop to the bottom of the market in the third quarter of 2010 showed that there was still sufficient value to cushion the blow for a well-underwritten construction loan. These trends and metrics are what drive our pledge to our investors and capital market partners. That is: we will not waver from our loan-to-cost and loan-to-value parameters that establish a safe benchmark particular to the subject market and asset type, regardless of the attractiveness of higher risk capital returns.  


Following the economic recession caused by the pandemic, the Freddie Mac Multifamily Investment Market Index dropped slightly from 236 in the first quarter of 2020 to 234 in the second quarter, and forecast another drop in subsequent quarters. Sales volume is expected to lower as sellers will hold off selling into a down market—with declining rent collections and lower net operating income—and avoid low-bid buyers trying to pick up a bargain from distressed sellers.  The Summer 2020 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey showed pessimism and a drop in sentiment for developers across all commercial real estate spaces in 2023. Despite these dire survey results and reports of rent and occupancy declines, this has had little effect on development activity, according to the survey. 


In fact, Parkview has seen continued strong demand for construction financing. We recently underwrote several mixed-income projects where increased numbers of market-rate units offset the cost of providing affordable housing, a trade-off that developers find particularly advantageous in urban infill markets.  We believe that with continuing housing shortages, these mixed-income projects can provide a measure of relief.  Nonetheless, it is expected that demand will continue to outpace supply in the long run, and the long-term trend as seen in the chart above will continue to be your friend. As an equity investor, let the mantra remain “caveat emptor,” but as a prudent lender with capital to invest, let it be “onward and upward”—be it a V or a swoosh.    


Fabio Baum is a Managing Director at Parkview Financial.


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