Investments in Private Real Estate

During the Great Recession, multifamily rents declined the least and, Post-recession, multifamily rents recovered the fastest. Multifamily has continued to perform well during the pandemic and has been the top performer in rent collections.

There has been a high concentration of supply in Class A properties in major metros for several years, though new development Class A rents are not affordable for most Americans. Class B and workforce housing in many markets is dated and in short supply, as they are unprofitable to build due to rising land, labor, and material costs. This presents opportunity to acquire existing Class B multifamily and execute on value-add capital expenditure programs to refresh dated product and improve the renter experience by meeting changing preferences.

This strategy mitigates risk in the event of an economic downturn, as the rent premium for the upgraded product is not necessarily dependent on market rent growth, and presents an opportunity to capture outsized rent increases, even in a slower growth environment. Rent collections for 11.4 million units of professionally managed apartments tracked by NMHC has averaged over 95% since the start of the pandemic. August year-over-year rents across Class B and C multi-family were up 1.5% and 3.0%, respectively, while Class A rents were down 0.7%, according to CBRE.

Weakness is already being exposed in Class A assets in the urban core of gateway markets, where vacancies are rising, rents are declining, as the asset class and markets are being squeezed from both the supply and demand sides. For the past few years, new supply has been concentrated in Class A, as rising land and construction costs have made it less economically feasible to develop affordable workforce housing. These new Class A developments with high asking rents have been concentrated in gateway markets, where there were corresponding high levels of tenant demand and income.

Although not immune, the knowledge and talent-based economies of gateway markets have cushioned the impact of past recessions. The pandemic, however, has upended demand for urban core, Class A in gate-way markets. With a significant number of companies in the major markets allowing employees to work from home, proximity to the office becomes less relevant. Urban living also typically comes with less space and higher density, which are less conducive to social distancing and accommodating work from home. Furthermore, the limited availability of dining, arts, and entertainment due to the pandemic have reduced the benefits associated with the high costs of urban living.

Fundamentals for B and C multifamily were strong going into the recession due to the limited supply of affordable housing, and so far, demand is holding up. However, the high sustained levels of unemployment and the expiration of government economic support pose risks to this segment, particularly Class C, which often servers lower income residents who were already financially stressed before the current recession.

Senior housing has been impacted more in the current pandemic‑induced downturn than compared to other recessionary periods. This is due to the nature of the virus and the measures required to prevent its spread

Covid-19 poses the greatest risks to seniors. Senior housing also experienced the human and economic tolls of Covid-19 early on, with fatal outbreaks at several communities. Many facilities enacted safety procedures that included limiting admissions and visitations to insulate the communities and protect residents. At the same time, some residents chose to move out, citing virus concerns, while other prospective residents delayed decisions to move in. These combined factors have put downward pressure on demand. Occupancy declined across all three segments of senior housing— independent living, assisted living, and memory care—and reached a record low in 2020, according to the National Investment Center for Senior Housing.

While senior housing faces near-term headwinds from declining occupancy rates and rising operating expenses, the long-term fundamentals remain attractive. The number of Americans over the age of 65 is projected to nearly double from 52 million in 2018 to 95 million in 2060, causing the 65-and-older age group’s share of the total population to rise from 16% to 23%, according to the US Census Bureau, Population Projections. It’s clear that aging demo-graphics will continue to create demand for senior housing.

Senior housing ownership is also highly fragmented. The top ten senior housing providers control 33,708 units each, on average. The average of the top 50 providers drops drastically to 12,124 units. Many owners are smaller regional or local “Mom and Pop” owner/operators. Senior housing is also an operationally intensive asset with thin operating margins. The fragmented nature of the industry provides opportunities for consolidation and for experienced, institutional operators to improve operations and efficiencies.