On today’s show Anna from silicon Valley asks
Is now a time to be investing in multi-family real estate? Surely there are deals coming up on the market.
Anna, this is a great question.
Some people have adjusted their criteria in terms of what is a deal as the market has heated up over the past decade. I’m a believer that the criteria for investing should not vary dramatically with market conditions. That is to say, you should be conservative in your underwriting. But the truth is, virtually nobody under the sun who is syndicating multi-family apartment deals would have realistically designed a project to withstand the kind of economic shock we are currently experiencing. No rational risk manager would have assumed a continent wide 75% drop in restaurant revenue in a 5 week period, nobody would have assumed a jump in the unemployment rate to over 20% in less than a month. There are now more than 33 million unemployed, or a real unemployment rate of 20.6%—which would be the highest level since 1934.
The fact is, investors want certainty. Lenders want certainty. The process that both investors and lenders use is to point to history.
If you have a seller looking to sell, they’re assuming the value is based on a historical metric which clearly is no longer valid, despite the fact that the history is no more than two months old.
The buyer on the other hand is looking forward at what is, and what is likely to be the case in the coming weeks and months. Because of these two perspectives, there is currently a wide gulf in expectations between buyer and seller on how to value a property.
It’s going to take some time for sellers to readjust their expectations of what their properties are worth
The lender performs three forms of due diligence, the same as any investor should do. They need to qualify the borrower, the asset, and the submarket. All three of these require some history. But in today’s market, there is no Covid-19 market seasoning. We don’t have 12 months of history deep into this economic downturn from which to predict the future.
The problem is that there is simply no modern day precedent for what has happened.
A lender is really asking one simple question.
If I lend you money, how am I going to get it back. How will I get it back if things go well, and how will I get the money back if things don’t go well.
The key question is whether things will go back to normal when this pandemic is over? Or will there be a new normal that doesn’t resemble the way things were?
Knowing how to value a property in this new normal is the key question. We simply don’t have enough history accumulated to be able to say what the new normal is going to be.
In the world of multi-family apartments, the demand is the same now as it was two weeks ago. The population is largely the same. Very few people have moved during this period of social isolation. So the demand hasn’t changed.
What maybe has changed is tenants’ ability to pay. With 26 million job losses in a matter of weeks, combined with moratoriums on evictions, politicians calling for rent boycotts, the ability to pay is highly questionable.
But when you have a high economic vacancy, such as we have right now, establishing the net income becomes difficult. So then establishing the value becomes impossible.
It’s going to take time. Don’t be in a rush.
