The Pros

• 10 year treasury yields are unbelievably low.

• The Federal Reserve cut its benchmark interest rate to almost 0%.

• Debt in some cases is meaningfully cheaper than it was a month ago. 

• Sustained low rates may create downward pressure on cap rates.

The Cons 

• Tenants may fall behind on their rent. Employees of all types, particularly those touched by the trickle-down effect of travel restrictions are at risk of shouldering a substantial economic burden reflective of reduced hours, or worse, terminated employment. Lost wages coupled with the precipitous drop in equity values (a metric tightly correlated with consumer savings) creates a significant risk to multifamily property net operating income and therefore, from an income capitalization approach, value. A second order outcome could be a fracture in the implied security of what has historically been perceived as a recession-proof asset. This is not to say that multifamily, as an asset class, will not be incredibly resilient but the effects of declining occupancy and net operating income directly impact valuations and can easily snowball to affect capital markets, as less owners would qualify for conventional financing and the risk of defaults would loom.

• Agencies are pushing up floors and spreads to hedge against volatility and potentially fear of blowing through their caps because of the knee-jerk inundation of loan applications when 10-year treasury yields broke below 1.00%. Today, March 16th, 2020, Fannie® and Freddie® pushed up baseline spreads while Fannie® held its 90bp treasury floor and Freddie® remains at the greater of 75bps or -15 from the treasury at time of quote. Freddie® SBL increased coupons by 25bps across the board this morning as well. 

• Multifamily property buyers may get spooked, we’ve already seen this, which could create a widening between asking prices and bids and a (temporary) reduction in market liquidity and transaction velocity possibly leading to price reductions. 

The Unknown 

• The biggest issue in my opinion is the unknown. It is the element of uncertainty that is driving up the price of sovereign debt and driving down yield. It’s what’s causing a flight from equities. It’s what pushes out credit spreads and it's what keeps everyone on self- or government-imposed quarantine. As the great minds of our generation put their heads together and aggregate data, this uncertainty will inevitably pass. This is not to say that we will not have a big problem on our hands. It is to say that as we continue to aggregate and translate the data, we will know better what we are dealing with and have sufficient evidence to create an actionable plan. As we become more informed, panic will be replaced by prudent precaution. 

• What are the repercussions of continued QE (quantitative easing)? I floated this in a LinkedIn and email post recently: is this next round of QE sufficient to help us through this sudden, worldwide economic bottleneck? I can’t imagine it is. What are the long term impacts of the continued printing of money and throwing it at our problems? We don’t really have a reference point. This sovereign debt bubble is a new thing. The word bubble is quite intentionally chosen here. Again, I’m not an economist, but I feel like more than a few countries in South America have tried printing their way out of economic cycles… How did that go? I am not saying this is an apples to apples comparison, but it feels like oranges and tangerines? Botanists, forgive the crude metaphor. 

• The Fed is out of bullets. That 100BP drop was our last piece of likely meaningful ammunition in the face of a recession. Now what can the Fed and the US government do if we face a real, long term recession? I don’t necessarily fault them (or not fault them) for this QE and rate-cutting decision but I do wonder if it’s the use of a sledge hammer in lieu of a scalpel, or as I’ve mentioned in other posts and articles, pushing a string. Will we be forced to negative interest rates in the future? Negative interest rates did not have the desired effect in Japan.

What Now

Well, for starters, wash your hands and don’t sneeze on anyone, right? I don’t want to give any direct advice but I’d like to share some anecdotal notes. Markets run in cycles, irrational exuberance is often followed by similarly irrational panic. If you’re in equity markets, the bulk of us normal humans have this weird tenancy to buy tops and sell bottoms. Over time (and I certainly can’t say how long it will take) this too shall pass. If you’re thinking about refinancing multifamily or commercial real estate debt, rates may be higher than they were a month or two ago with agencies, and lower with FHA and banks. They may be static. The primary thing right now that is static though is the very non-static nature of credit markets. I’d probably be pulling the trigger on something if there is a looming maturity afoot. We don’t know how long this will last or the medium-term repercussions on capital markets. If you have a good deal and you’re waiting for the best rate ever, you may just want to go ahead with it because if tomorrow is unknowable, so is Q2… and Q3. Finally, be responsible but don’t panic. 

Was this helpful? If so, please share with colleagues. Do you have suggestions or comments? Email me at blake@janover.ventures and I’ll do my best to be as responsive as possible. Wishing everyone a safe and hand-sanitized Monday.

Related Questions

What are the potential long-term effects of the coronavirus on the multifamily industry?

The long-term effects of the coronavirus on the multifamily industry are still uncertain, but there are a few potential impacts that could be felt. One potential effect is that the labor shortage could continue to cause staffing issues in banks and other financial institutions. This could lead to difficulty in obtaining financing for multifamily projects. Additionally, supply chain and oil price issues could continue to affect new construction rates and developer costs, making it more difficult to build new multifamily projects. Finally, with more people working from home, there could be a decrease in demand for multifamily housing, as people may not need to live close to their workplace.

For more information, please see the following sources:

• Green Street Advisors report on the performance of U.S. REITs
• Fox Business article on the Fed's benchmark interest rate
• Janover Inc. article on building classes
• Janover Inc. article on treasury yields and commercial mortgage rates

How can multifamily owners and investors prepare for the economic downturn caused by the coronavirus?

Multifamily owners and investors can prepare for the economic downturn caused by the coronavirus by focusing on key fundamentals, such as location, size, and tenant mix. It's important to take a long-term view of investments and not sacrifice long-term stability for short-term gains. Structuring deals in a way that makes sense from a risk/reward standpoint is also important. Additionally, diversifying property types, considering alternative investments, reviewing debt structure, and increasing cash reserves can help minimize risk.

For more information on fixed rate loans and their benefits, please see this article.

What strategies can multifamily owners and investors use to mitigate the financial impact of the coronavirus?

Multifamily owners and investors can mitigate the financial impact of the coronavirus by taking advantage of refinancing and recapitalizing their investments. Refinancing allows owners to pay off existing debt and/or free up cash to renovate their asset, potentially increasing the value of their property. Refinancing can also help owners obtain lower interest rates, which is especially advantageous during volatile economic conditions. Additionally, owners can take a cash-out refinance to tap into equity accumulated over the years and invest the extra cash into property upgrades to make them more attractive to renters.

For more information, please see the following sources:

• 5 Real Estate Exit Strategies for Multifamily Investors
• Should You Sell or Refinance Your Multifamily Property?

What are the best practices for multifamily owners and investors to manage their properties during the coronavirus pandemic?

The coronavirus pandemic has had a major impact on the multifamily industry, and it is important for owners and investors to take the necessary steps to protect their investments. Here are some best practices for managing multifamily properties during the pandemic:

• Communicate with tenants: It is important to keep tenants informed about any changes to the property, such as rent payment policies or other safety measures. Keeping tenants informed will help to ensure that they are aware of any changes and can make informed decisions about their living situation.
• Review financing options: With the current economic uncertainty, it is important to review financing options to ensure that the property is able to remain financially stable. This may include refinancing existing loans or exploring new loan products. This article provides some tips for finding the best multifamily refinance in a recession.
• Implement safety measures: It is important to implement safety measures to protect tenants and staff from the spread of the virus. This may include providing hand sanitizer, limiting access to common areas, and providing masks and gloves. This article from the CDC provides some tips for cleaning and disinfecting common areas.
• Explore rent relief options: Many states and local governments have implemented rent relief programs to help tenants who have been impacted by the pandemic. It is important to explore these options to ensure that tenants are able to remain in their homes. This article provides an overview of some of the rent relief programs available.

What are the most important considerations for multifamily owners and investors when evaluating financing options during the coronavirus pandemic?

The most important considerations for multifamily owners and investors when evaluating financing options during the coronavirus pandemic are:

• The current market conditions and how they may affect the value of the property.
• The availability of financing options, including government-backed programs.
• The terms of the loan, including the interest rate, loan-to-value ratio, and repayment terms.
• The ability to refinance or modify existing loans.
• The potential for rent relief or other assistance programs.

For more information, please refer to Multifamily Financing: Your Comprehensive Guide.

What are the best ways to protect multifamily investments during the coronavirus pandemic?

The best way to protect multifamily investments during the coronavirus pandemic is to take advantage of the asset type's features, such as the ability to raise rents faster than other types of real estate investments. Additionally, multifamily investments are good inflation hedges, as leases are generally handled once a year, giving you ample time to adjust your rates to changes in costs and market dynamics. Finally, there are many competitive loan products available for multifamily investments, such as Fannie Mae, Freddie Mac, and HUD loans, which offer low interest rates and long-term financing.

For more information, please see this article from Multifamily.Loans.