ArborCrowd has always been very selective with new investments. Over the past few years, purchase prices for new multifamily investment opportunities have been near historical highs due in part to increased demand for the asset type, which compressed yields. Rather than focusing on transaction volume, ArborCrowd has focused on high-quality assets with the understanding that when the market eventually turns, quality deals would be better positioned to weather turbulent times.
While no one anticipated that a market decline would occur as a result of a global pandemic, COVID-19 has caused major economic disruptions across the country and the world. Fortunately, our one-deal-at-a-time model allows us to quickly adapt in this climate.
Despite being located in New York City, which has been hit hard by the COVID-19 outbreak, we have continued to conduct our business as usual, albeit remotely. We remain in contact with our investment partners, brokers, and other industry contacts who are actively bringing us investment opportunities to screen. We continue to evaluate these new deals while still maintaining our rigorous underwriting process. Of course, as we explain later, we now place a stronger emphasis on certain underlying assumptions to account for the current economic environment.
These are unprecedented times, but similar to the economic disruption in the Great Recession, we believe the current financial crisis caused by COVID-19 will create historic buying opportunities, which we intend to capitalize on.
How we are looking at deals in this environment?
We said at the beginning of the year that while 2020 could experience a slowdown in the number of multifamily transactions, there are still opportunities to find strong investments. Recent events have only furthered this belief.
We are focused on identifying resilient markets that have historically exhibited strong growth after previous market slowdowns, while also identifying new markets that have substantially changed over the past decade and are primed for continued growth after the potential downturn. In order to capitalize on opportunities in these markets, we are working with our existing network of sponsors, and identifying new well-capitalized and seasoned local sponsors with solid track records.
Additionally, while we have always employed realistic underwriting standards when evaluating new deals, the need to stress test certain assumptions is more important than ever. With the economic impacts of COVID-19 manifesting itself across the country, individual markets will over time either show their resiliency or reveal weaknesses. By closely monitoring macro and microeconomic data in real time, as well as communicating with local market relationships, we can proactively recalibrate certain assumptions in response to changing market conditions.
An example of these assumptions could include collections loss. With more people out of a job, some tenants may find it more difficult to pay rent and that could result in a larger loss of collections. Another example of an assumption that could now change is rent growth. The percentage of rent growth a property is expected to achieve needs to be carefully considered as rents can grow at a slower pace in a downturn. Construction costs, however, is an assumption that may change for the better. Labor costs and supplies are anticipated to be reduced, which can lower total construction costs. Of course, all of these assumptions and others depend on the market, the asset type and even the tenant mix.
Since we can’t tour properties, how do we verify assumptions?
A critical part of a comprehensive underwriting process is visiting the property. During our site visits, we tour not only the subject property or development site, but also comparable properties and the surrounding market. This helps us better hone in our underwritten rents and understand overall pricing for properties in the market as well as other underwriting assumptions. The COVID-19 pandemic has severely limited our ability to travel to sites for the next few weeks and potentially months.
We have always utilized a variety of methods to acquire accurate property information prior to touring a potential investment and now is no different. Currently, we are putting more emphasis on these sources, such as utilizing past experience for markets we have invested and operated in, analyzing proprietary market data points and information, and talking with local professional contacts to discuss market conditions. Our local contacts are a plethora of property managers, brokers, market professionals, and a proprietary network of experts and specialists connected within The Arbor Family of Companies. By utilizing these available sources, we can substantially screen and lock in investment opportunities contingent on us touring the properties and markets when it is safe to do so.
Conclusion
During this time of market disruption, it’s as important as ever to stick with sound underwriting fundamentals and to adapt assumptions to changing market conditions. We are utilizing technology to stay connected with our vast network of trusted market professionals to identify and evaluate new deals, and provide real-time market information during these uncertain times. Historically, market disruptions have provided discounted investment opportunities for those, like ArborCrowd, who can adapt quickly and have the liquidity to capitalize on those opportunities. We believe this time will be no different and look forward to the opportunities that lie ahead.