By Les Shaver | December 07, 2020 at 07:32 AM
When COVID hit, transactions in the apartment market, like many commercial real estate sectors, ground to a halt.
For a short period, there was a 5% to 10% discount on deals that did move in the summer, according to Noah E. Hochman, co-chief investment officer and head of Capital Markets for TruAmerica.
But that didn’t last long.
“As the capital markets stabilized and you could borrow in the 2% range, cap rates returned to pre-COVID levels,” Hochman says. “With the exception of markets like maybe Las Vegas and parts of Orlando that have a lot of credit exposure in the service sector, values are probably the same as they were pre COVID.”
Hochman says many investors who are diversified across asset classes are taking a hard look at their portfolios and how other asset classes perform. “They are rebalancing the multifamily because they’ve seen it as being very resilient in this crisis. So with low-interest rates, there is a lot of capital that wants to buy multifamily right now. It has really supported the pre-COVID values.”
Even if things deteriorate in some of these markets, lower leverage should help many apartment owners hold on to their properties.
“If you have moderate leverage on a deal, even if 20% of your building isn’t paying their rent, you’re still probably able to break even with your cash flows,” Hochman says.
Still, in some instances, owners may be overleveraged and there could be distress. “I think it’s too soon to know whether people lose their assets,” Hochman says.
For other CRE sectors, the story is different. “It’s a little bit different than some of the other asset classes, like hospitality where hotels are closed or running at 10% or 15% occupancy or some retail centers where people just stopped paying rent,” Hochman says. “Most Americans are paying their [apartment] rent, so you have to be very over-levered to probably be in serious trouble.”
Even before COVID, TruAmerica saw people leaving coastal cities. So the company focused on markets like Phoenix and Atlanta and cities in Texas and Florida.
“That [the movement to those SunBelt locations] has just been accelerated because of COVID,” Hochman says. “People can work remotely now, so they might as well work in a cheaper location. We’ve been focusing on these markets that have opened up early, and we see rent growth.”
When Hochman spoke with GlobeSt.com in November, TruAmerica had nine deals in escrow.
“We’ve been trying to focus on the long-term fundamentals of the business and the markets that we feel like are going to deliver some of the strongest rent growth that we see in the next two to three years,” Hochman says.