Small Apartment Pricing Improves in Q3

Throughout the COVID-19 recession, it has been anticipated that smaller apartment owners would bear the brunt of the problems in the multifamily sector. 

If rent payments are late or units are empty, there are fewer apartments to spread that revenue loss over. Also, many tenants in smaller apartments are likely to have lost jobs in this recession.

Facing those headwinds, it shouldn’t be a surprise that through August, 76% of loans in forbearance were tied to their Small Balance Lending program, according to Freddie Mac.

Still, asset prices for small apartment properties improved 1.3% in Q3, according to the Arbor Small Multifamily Price Index and the agencies are a big reason for this.

“Overall, while small multifamily is working through its fair share of coronavirus-related pain, the agencies’ support and the sector’s resilient underlying demand fundamentals continue to reinforce a favorable long-term outlook,” according to Arbor’s Q3 2020 Small Multifamily Investment Trends Report.

Estimates of 2020 new multifamily loans with original balances between $1.0 million and $7.5 million fell to $52.1 billion, according to Chandan Economics’ analysis of a limited pool of loans with original balances of $1.0 million to $7.5 million and loan-to-value ratios above 50.0%. That would be a 12% decline from the $59.2 billion posted in 2019.

Cap rates for small multifamily acquisitions averaged 60 basis points higher than properties were refinanced in Q3. Refinanced loans were 78.8% of all small multifamily originations, which is increased from what Arbor called “an already elevated 73.9%” mark in the second quarter. Last year, the refinancing was between 61.2% and 66.7%, according to Chandan.

National cap rates for smaller apartment properties fell by 16 basis points in Q3 to 5.3%. Revised Q2 estimates put small multifamily cap rates at 5.5%, which dropped 25 basis points from Q1. Arbor says that risk-free interest rates near their lowest record levels pulled down all other market-level returns.

While the agencies’ presence provides a vital backstop to smaller apartment owners, their struggle is likely to continue with survival depending on how landlords navigate the recession with a strapped tenant base. 

“The people who would likely be in a three-star [apartment community] or below are the ones who are feeling less financially stable. So we would expect that to show up to some degree in those lower-quality apartments,” CoStar Advisory Services Consultant Joseph Biasi told in an earlier interview. 

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