Operators can expect renters to stay put as the COVID-19 crisis continues to unfold (credit: Annie Spratt).

HOUSTON—Not only has COVID-19 upended Americans' daily routines but also how capital is invested and transactions are conducted in the multifamily industry. While the caution level in the industry is warranted, that same cautiousness must be met with careful optimism based on detailed analysis, hard data and level-headed assessment of the new reality, says Berkadia.

Initial lease renewal rates exceeded 53% in 2019. According to RealPage, renewal rent growth has consistently registered around 4.5% annually for the past few years. Operators can also expect renters to stay put in the meantime as the COVID-19 crisis continues to unfold.

Thanks to strong fundamentals and inelastic demand, multifamily housing remains an attractive target for investors. That said, the COVID-19 crisis will likely produce ripples through the industry that affect how investors view the short- and long-term performance and overall value of multifamily assets.

The short-term impacts of COVID-19 will be capital flowing into the multifamily industry. At the moment, billions of dollars in investment capital remain on the sidelines. But, in looking at the bigger picture, the recent changes in federal interest rates point to this massive volume of capital that will soon be searching for yield.

But who's lending and who isn't? Banks might have pulled back but Freddie/Fannie are moving forward as well as alternative lenders such as Electra Capital. Tucker Knight, Berkadia senior managing director and head of Texas originations, recently shared some insights on the Fed's decision and the lending outlook for landlords.

"The reality is that it's too soon to tell how this will impact the Houston apartment industry," Knight tells GlobeSt.com. "Clearly, the hospitality, retail and energy sectors are taking a big hit right now, but if this is temporary and the federal government offers some kind of relief package, those sectors are generally resilient. An important thing to keep in mind is that the fundamentals were strong going into this. This is not like 2008. We are closing deals. In fact, the issue is that with people being shuttered in their homes, it's difficult to do inspections, get appraisers on site, or file records at the courthouse. Everyone is trying to navigate that and keep business moving forward. In terms of capital, Fannie/Freddie are still doing business, as are the life companies. CMBS markets for the most part are stagnant, banks are being extremely selective and there are some boutique lenders open for business. Until there's some clarity, I think people will be understandably cautious."

There's no question that investors will be scrutinizing options more closely than ever. Here are four ways Berkadia expects expectations to be adjusted:

• With an economic downturn all but certain, class-A product may be vulnerable to short-term adjustments in demand. Operators of newly constructed properties will be the most likely to feel pressure to offer deep rent discounts to lease up new supply coming online through the rest of 2020.
• Class-B properties will likely be among the best-positioned opportunities for multifamily investors, and related deals should experience a subsequent influx of capital. The large spread between rents at class-A versus class-B properties now presents a twofold opportunity for investors: both traditional long-term upside and short-term opportunities for attracting renters looking to cut costs as a result of recession pressures.
• Class-C assets are the most susceptible to a major disruption. A large proportion of workforce housing consists of tenants that live paycheck to paycheck. A recent national moratorium on evictions may provide relief to these individuals, but the reality is that those low-income renters are also the most at risk of losing their jobs during this period.
• Finally, markets with employment hubs weighted towards trade and hospitality industries will likely give prudent investors pause before moving forward on deploying new capital. Areas most likely to feel the most economic pain from COVID-19 and incur dips in capital flow for multifamily projects include Las Vegas and Orlando.

Despite the mounting number of hiccups expected to affect the multifamily market, overall demographics will continue to highly favor multifamily investors. Strong demand will remain during the next decade as renters in their 20s and 30s begin to make up an increasingly larger percentage of the population.

Multifamily remains a relatively stable investment in the long term. And when examining yield returns from an international perspective, the United States is still the safest and best market for capital appreciation, says the Berkadia report.