Part I of a Two-Part Series

Over the past month, we’ve received a lot of questions from investors about the implications of the COVID-19 virus for multifamily real estate and PCRP Group’s business model given the uncertainty of the times. We’ve answered a lot of them individually, but it struck me that taken together this would be a great resource for our entire community of investors.

To make sure we get to all of them, we’ve broken down the Q&A into a two-part series. Here’s Part I, with Part II to follow next week with answers to your questions on the current crisis, its effect on residential apartment buildings and our PCRP Group portfolio.

  1. You’ve previously pointed out that multifamily property investors did much better than single family, industrial or any other real estate class in the 2008-2009 downturn. How is the current crisis playing out for multifamily real estate versus the various other real estate classes?

This is a good point to say something general: when I use the term, “good news,” that’s a very relative statement and often it applies more to the investor than the tenant.

The COVID-19 outbreak is a tragedy for millions and the lockdown it precipitated affects certain groups, perhaps predictably, more severely than others. Among the groups we usually hear about – the poor, the uninsured, the elderly and those with pre-existing immune compromised conditions ­– another group that has received less attention are those living in density, in multigenerational families and basically in apartment buildings. Like it or not, density is clearly an issue in a pandemic, and hotspots of the outbreak tend to cluster in places where these groups live and work.

So what does that mean for multifamily real estate? Well, let’s start with a point of clarification. First of all, while multifamily real estate may evoke images of high rise living in city centers, in fact only a small percentage of the overall multifamily units nationwide are located in city centers – and none currently operated by us – falls into that category. For PCRP Group’s part, we don’t target core city markets for a variety of reasons.

Real Estate, of course, is not just about multifamily residential. Single-family real estate became an industry unto itself in 2013 after Wall Street was able to take single-family rental housing one step further as a commodity for trading. Wall Street predicted rental housing was going to be a very lucrative investment with strong returns for their investors; and Wall Street, in this case, was  right. Within Commercial Real Estate, you’ll find office buildings, real estate, storage facilities, mobile home parks, hotels and hospitality, assisted living and student housing as well as industrial real estate –warehouses and factories – are another whole subsegment. And out of that long list, most of which performed quite well for investors in the years since 2011 – only multifamily residential and non-core commercial sectors like storage facilities, manufactured housing and mobile home parks look resilient right now.

Again, this good news is relative: single-family is holding its value for the time being as government aid for families and for lenders kicks the can down the road. And, of course, there’s a segment of the urban population who are actively looking to buy single family homes outside densely populated areas. So, for the time being, there’s been no repeat of the defaults and foreclosures on single-family, and in fact, in some areas, a seller’s market. But we do predict there will be foreclosures simply due to the fact that we currently have an effective unemployment rate of about 23% by some estimates.[i] These figures are more in line with the Great Depression than the Great Recession of 2008.

Multifamily is quite different. In 2008-2009 and for years afterward, foreclosures and tougher lending standards created a funnel of people who either chose to or were forced to rent. That is still largely true as homeownership is declining due to other factors such as crushing student debt, the inability to save for a down payment and the lifestyle choice of a large segment of the rental pool who are simply renters by choice. Those facing economic difficulties today, in the midst of a pandemic, are unlikely to prioritize any expense higher than their residence, which after all, is currently where they self-isolate. You see this reflected in the relatively good rent collection figures. For the week ending May 6, the National Multifamily Housing Council reports 80.2% of renters made their payments, up slightly from April (78%), and only slightly worse than the figures for the same week of 2019.

Source: National Multifamily Housing Council

This reflects several things, to my mind: First, as I mentioned, in a pandemic avoiding eviction – even if some jurisdictions like New York and Chicago have forbidden landlords from doing so for the time being – is a huge personal safety issue. Whatever savings and severance people have ­– plus whatever aid Washington provided – all went to shore up the May numbers.

Those numbers will worsen, however. Small pools of savings will run dry; unemployment will kick in, yet government aid like the $1200 per person dispersed in the first “relief bill” may not be repeated. June and July may see significant drops in those numbers, and that is going to pressure multifamily operators who failed to appropriately stress test their projects. More on that later.

  1. PCRP Group did not bring a specific project to its investors in the second half of 2019. Why is that?

There are several reasons, and I’ve answered this question from my investor group repeatedly starting well before anyone had heard of COVID-19. The first answer is easy: mathematics. PCRP Group scrutinizes projects in our markets for a variety of characteristics: climate resilience, deferred maintenance, the viability of making improvements that will raise net operating income (NOI), and of course the general health and vitality of the region where the property sits.

Beginning in early Q3 2019, our analysis found in a wide variety of markets – from Colorado Springs to Raleigh to Atlanta to Indianapolis – that the numbers for properties on offer simply did not add up. Asking prices reflected an inflated sense of value typical of the “top of the market,” a perilous moment to buy anything, let alone a multimillion-dollar apartment building.

By the Q4 2019, we had decided it was time to wait out the market. Certainly, we could not foresee the radical impact that a pandemic would have, bringing the global economy to its knees in a matter of weeks. But we’re serious about risk calculations and about making sure we stress test any project to perform – or at least break even – in the worst of times. As it happens, that’s just what we got, and if you look back at what I’ve written over the past several months, you’ll see that we were unwilling to bid on a property just for the sake of bidding.

The second reason is more subtle. I’ve been watching some of the larger global real estate players ­– Blackrock, in particular ­– continue to raise money during what they must have known was the tail end of a very long expansion (technically from June 2009 to March 2020). The messaging around the largest real estate fund they had ever raised – some $250 billion – was basically “keep your powder dry.” That looks brilliant right now. It bolstered my own determination not to rush into something that looked acceptable and, instead, to wait for “the Buffet moment,” as I wrote about last month.

The bottom line, I think, is that well-structured multifamily investments dating to 2016 and 2017 will sail right through this crisis and continue to kick out passive income for investors for years to come. 2018 was pretty close to the top of the roller coaster ramp; 2019 was the top of a fully inflated bubble. I’m feeling pretty happy – and I hope my investors are too – that we decided to wait the year out.

  1. What signs are you looking for in the current environment that things are stabilizing?

As I suggested in my last answer, I see rent delinquencies increasing in early summer as resources dry up and the debate in Washington over relief funding becomes more and more political. Remember, this is an election year. We’re already seeing decisions driven more by politics than immunology in many places. Bringing bipartisan relief will only get harder as the year wears on. If somehow the two parties come together and pump another stimulus into households – or even better, provide relief to landlords if they agree to pass that on to tenants ­­– that will be a very good sign.

There’s also the raw rent collection numbers. Here are bright signs in the rental data, and I’m hoping to see a turn for the better by August. For instance, Apartment List, a national real estate tracking service, reports in its May rental survey that by the end of April only 9% of the nearly 22% who had failed to make rent on time (by April 6) had made up the arrears. They also found that an increasing number of renters surveyed had found work from home to partially compensate for lost income, giving them optimism that they’d be able to ride this crisis out. So the June and July numbers, I think, will be hard to look at. But hopefully late summer will see some stabilization.

I’m also keeping a sharp eye on mortgage servicers, who today are in the kind of “weak link in the chain” position that banks like Merrill Lynch and Washington Mutual were in 2008-2009. Higher lending standards after the global financial crisis pushed big banks to target wealthy clients for mortgages, leaving the majority of households to mortgage servicers.  Quicken Loans is one you’ve heard of, but most of them you have not heard of, and unlike banks, they have no legal obligation to have massive reserves around for a rainy day. Well, it’s raining pretty hard right now. If they get into trouble, my guess is they’ll be merciless with single-family owners and we’ll see a kind of “late onset” foreclosure crisis. This will be a devastating event for a second time in just over a decade. But as in 2008-09, it will also expand the pool of renters seeking a multifamily solution to housing.

The final factor is impossible to predict: the second wave. Based on nothing but instinct, my thinking throughout has been that New York, LA, Seattle and other large metros took the brunt of this pandemic early on because of density. Think of the way Hollywood releases a blockbuster; it doesn’t open in Laramie, Wyoming or Mobile, Alabama. They open in New York and LA because that’s where the most people are located to consume the marketing blitz associated with the opening. COVID’s a bit like that, I’m afraid. And like any blockbuster, COVID-19 is coming to a theater near you. It’s just a matter of time.

Stay tuned for Part II of our Crisis Q&A special next week. And always remember, at PCRP Group, we love talking about multifamily real estate, the basis for our views and how investments in our projects can produce lasting, tax-advantaged, sustainable and resilient income streams for decades to come. If you would like to learn more about the advantages of multifamily investing with us, email me at to schedule a call or just to chat. 

[i] This figure includes those who have given up looking for work who get dropped from the US Labor Department’s accounting methods. The official US Bureau of Labor Statistics figure is now 14.7% and rising.