Bid-Ask Gap Stymies Multi-Family Trading
Continued uncertainty about the duration and long-term impact of the coronavirus pandemic on multi-family properties is causing a disconnect between the pricing expectations of potential buyers and sellers.
Owners point to strong April and May rent-collection statistics as evidence that their properties’ values are holding up. But with unemployment rising and the economy slowing, buyers are skeptical.
The result, according to market pros: Investors are looking for discounts of 10-15% from pre-pandemic prices, while sellers are only willing to shave off 5% or less.
Although there is plenty of capital lined up for multi-family purchases when conditions clear, investors are finding it increasingly difficult to underwrite cashflows and assign values to apartment properties amid economic uncertainty. The pricing standoff shows little signs of easing any time soon.
“The big concern that investors have today is, what is my rent level and what are my rent-collection numbers,” said Brian McAuliffe, president of CBRE’s capital markets division. “Investors are trying to identify what the effective rent is going to be — not just for this month or the following month, but for the balance of the year.”
Getting an accurate estimate of effective rents — after factoring in forbearance, concessions and collections — is “by far the most important variable in transaction activity and pricing right now,” McAuliffe said.
Rent collections this month have been surprisingly strong, surpassing April’s figure nationally, according to the National Multifamily Housing Council. In a survey of managers of 11.5 million market-rate units, it found that 90.8% of tenants had made a full or partial May rent payment by last Wednesday, compared with 89.2% at a similar point the previous month. Although these figures are lower than the same period last year, they were better than many had expected.
But most potential bidders are taking a wait-and-see stance.
“There is not a lot of transaction volume right now because buyers want a discounted price to offset the risk for taking on a new deal in an uncertain world, and sellers aren’t willing to concede on price given April and May have largely outperformed expectations,” said Eddy O’Brien, managing partner and co-founder of investment firm Blaze Partners of Charleston, S.C. “I think this bid-ask spread is likely to persist for a couple of months until there is more clarity on ultimately what the impacts are on rent rolls and cashflows.”
There is also simmering concern that the April and May collection numbers may be misleading. Federal stimulus checks — including a $600-per-week lifeline for newly laid-off workers — are likely enabling many tenants to keep up with their rent. But those are slated to run out in July.
“The issue now is that nearly 40 million Americans are unemployed and it is clear that they are using government stimulus to pay rent,” said Travis D’Amato, managing director of investment sales in Walker & Dunlop’s Boston office. “What happens when that funding stops? Collections have been better than expected in April and May. How much of that is temporary? When you’re driving in the fog, you go slow; when it is clear, you step on the gas. And right now, we’re driving in a snow storm — visibility is at record lows.”
Other data also suggest the relative strength of rent collections could be short-lived. Zego, a San Diego payment-processing firm, reported that the use of credit cards to pay rent climbed 30% in April compared to March, and had risen another 20% by mid-May. Zego also noted that “management companies are incurring payment-processing fees to make it less burdensome on residents.”
Landlords also are ramping up the use of concessions to lease vacant apartments, according to research by Green Street Advisors, the parent of Real Estate Alert. The firm reviewed more than 600 properties owned by major REITs and reported May 1 that some 70% were granting move-in concessions. Most common were 2-8 weeks of free rent, but they also included perks like gift cards, cash credits and waived parking and pet fees.
Field Stern, vice president of investments at Redwood Capital of Chicago, said it’s the need for more clarity on operating revenues that’s holding up property trades.
“To me, there are two components impacting today’s valuations — capital markets and operations,” Stern said. Buyers today can underwrite a property’s equity and debt requirements, he said, but “until we get into June, we can’t really quantify the operational side of the valuation until we have financials with April and May data that allow us to draw real conclusions off the operational trends.”