Uncertain times warrant caution and deliberation, especially when conditions change quickly. Glencrest instituted a freeze on new investments in March when the COVID-19 pandemic resulted in widespread “shelter in place” orders and extreme economic disruption across the country. As a result, we passed on a project we’d put under contract a month earlier--there just wasn’t enough information about the impact of the coronavirus to make us comfortable.
Eventually inaction becomes a form of action, however. Now that we’ve had more than two months to evaluate the situation, we are ready to start carefully considering new investments again. Here’s why:
Strong industry performance
Nationwide, apartment rent collections have been much better than expected, in spite of record levels of unemployment. According to the National Multifamily Housing Council, 93.3% of apartment households paid rent in May, up from 91.7% in April and only 1.5% behind collections from a year ago. We saw similar performance with our portfolio.
At the same time, government-sponsored lenders Fannie Mae and Freddie Mac have continued to finance multifamily buildings with the lowest interest rates in history and made clear that forbearance will be available for properties with coronavirus-caused distress. Industry performance could - and probably will - decline significantly as the pandemic lingers, but the worst-case scenario of massive rent loss and no financing seems increasingly unlikely.
Government fiscal and monetary response to the pandemic
The federal government has flooded the economy with liquidity to a much greater extent than in previous recessions. The liquid money supply in the US is more than 20% higher than it was at the start of March. Programs like expanded unemployment insurance, the Paycheck Protection Program and Federal Reserve asset purchases are helping people pay rent and supporting property values.
There are many reasons to believe this policy response will continue until the coronavirus recession abates, especially because this is an election year and America has the world’s reserve currency. In a recent interview, Federal Reserve Chair Jerome Powell gave a flavor of the government’s ongoing commitment to provide support to the economy during this time.
Against this backdrop, we have growing conviction that rents and asset values are not going to fall as much as they have in past downturns and that they will recover more quickly.
Renewed appreciation for the benefits of private apartment investing
Recent volatility in the public stock and bond markets has been unsettling, as has the weakness in certain types of real estate, especially retail and hotel properties. Well-located apartment buildings that fulfill the fundamental human need for shelter, and that can be managed for long-term ownership rather than the quarterly demands of Wall Street, look like relatively attractive investment propositions right now.
In addition to operating cash flow and equity appreciation, private multifamily investing provides an inflation hedge (because rents are generally reset annually) and income tax shelter (from building depreciation passing through to the underlying investors). Because we think that extreme government liquidity today likely means inflation and higher taxes tomorrow, these elements may look increasingly attractive in future years.
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These considerations have us ready to start committing capital to quality apartments communities again. This doesn’t mean we’re throwing caution to the wind or declaring the concerns of COVID-19 behind us.
We plan to keep significant investment powder dry as the market continues to evolve, and to focus on opportunities that seem particularly well-suited to weather ongoing economic volatility and/or that present especially attractive pricing.
If you would like to learn more about our investment programs, please get in touch.