Multifamily showing resilient characteristics

Global Real Estate Perspective, August 2020

Despite multifamily in the U.S. recording a dramatic decline in investment volumes during Q2, in part due to the inability to tour assets, it continues to be the most liquid commercial real estate sector in the country – underlining its desirability as a defensive asset during these uncertain times. The sector also continues to benefit from notable secular shifts that remain intact, such as prolonged tenancy in rental accommodation and desire for flexibility.

Source: JLL, 2020

Multifamily owners and operators in the U.S. acted quickly to address mounting concerns related to asset maintenance and tenant comfort, helping to support healthy rent collection rates. Occupancy rates also held relatively steady throughout the second quarter, though a robust construction pipeline over the next year will challenge leasing strength in select submarkets, particularly in Class A space. Meanwhile the looming expiration of government support schemes and increased unemployment is also poised to test asset stability.

In Europe, rent collection levels are reported to be at or near pre-COVID-19 levels. Investor demand has also remained high with several markets reporting no COVID-19 related discounts. The resilience of multifamily cash flows, prospects of an extended period of record-low base rates and the investor chase for scale are all supporting strong pricing. Rising unemployment could put modest pressure on rents, but this is not anticipated to be a deep or prolonged issue given the structural undersupply of rental housing in most European markets.

In Asia Pacific, investors continued to acquire income-producing assets in the Japanese multifamily market for long-term hold, attracted by low borrowing costs and the stability of the sector. Some investors, however, are in wait-and-see mode amid the uncertainty of the pandemic.

A longer-term perspective: Focus on cash-flow stability

The resilience of multifamily will be tested by worsening unemployment rates in most markets across the world. Rents may come under pressure and, although collections on a relative basis remain well ahead of commercial sectors, cash-flow stability will be a focus for investors. ESG-supported capital flows are expected to target the affordable segment and this presents an enormous opportunity for cash-strapped municipalities to partner with long-term private capital in order to expand urban housing supply.