After several months of “stay-at-home” mandates due to COVID-19, the country recently began taking steps to reopen portions of the economy. But it’s clear that a long-term recovery is starting to take shape in the face of unprecedented job loss and some economic sectors still being on pause.
Multifamily real estate has had to adapt to this new normal, navigating mortgage forbearance and eviction moratoriums as well as updated operating procedures. It remains to be seen how much the immediate downturn due to COVID-19 will affect the sector over the medium- and long-term. What we do know from looking at past recessions is that multifamily real estate has historically taken less of a hit than other asset classes. We also know that even when property values decline in the face of economic uncertainty, multifamily tends to recover at a faster rate.
No real estate sector is fully immune from the impacts of a recession, of course. This was especially true during the 2008-2009 Great Recession, which was precipitated by a meltdown of the U.S. housing market. A report by RCLCO Real Estate Advisors found in that recession, rents declined between 4 and 4.5 percent for professionally managed apartments. Occupancy also fell to its lowest point in a decade, from 96 to 92 percent.
However, rents were growing moderately again by the fourth quarter of 2010 and even more substantially in 2011, according to RCLCO. A 2019 report by CBRE also outlined a strong recovery for multifamily as opposed to other sectors after the Great Recession. Once the recovery phase began in 2009, it took seven quarters for multifamily rents to hit its prior peak in mid-2011 compared to 21 quarters for industrial properties and 24 quarters for office buildings.
In the years since the Great Recession, a decline in homeownership has contributed to more renter households. Now, multifamily rental housing makes up a significantly larger part of the overall new housing market. While multifamily construction peaked in 2015 and 2016, according to RCLCO, the sector’s performance through 2019 remained healthy despite the new supply that entered the market, according to Freddie Mac. Occupancy rates were as high as 96.3 percent last year.
Looking further back at the recession in 2001, which followed the 9/11 terror attacks, multifamily again recovered faster than other real estate types. Multifamily rents declined 6.7 percent between the third quarter of 2001 and the fourth quarter of 2003, according to CBRE. But it took the multifamily sector just seven quarters – until mid-2005 – to return to its prior peak, while office and industrial rents struggled with deeper declines over a longer timeframe.
During the rebound, multifamily achieved 10 percent rent growth beyond its prior peak. However, industrial and office rents grew only 4.3 and 5.7 percent, respectively, beyond their prior peaks due to the longer period they required to recoup their losses, according to CBRE.
While no one can predict exactly how the multifamily sector will perform after the COVID-19 financial fallout, there are signs that the recovery will follow a similar pattern of past recessions: rent loss for a limited time followed by a strong recovery. We’ve seen the short-term impact mitigated by mortgage forbearance and the federal government’s stimulus package. In the midterm, there may still be rent decreases and potential rent shortfalls due to the high levels of unemployment. However, rent collection reports for April and May were more positive than expected, and saw the majority of apartment households continuing to pay rent.
Unlike 2008-2009, the pandemic recovery isn’t dependent on an overhaul of the real estate market. But even that historic market recovery led to growth for the sector that had sustained into 2020 until the COVID-19 pandemic. Because the multifamily real estate sector entered the recent crisis on such strong footing, there is hope that this will bode well for its ultimate recovery.