The economic impacts of COVID-19 have reverberated throughout the economy and created questions around the related effect on commercial real estate – specifically multifamily – valuations. We are sharing a series of three posts covering common questions we have been asked since the onset of the pandemic covering our current thinking and strategies around: short term risks, long term risks, and capital market changes.
What are the long-term risks to multifamily investments posed by COVID-19?
Long-term property values remain intact; however, a prolonged employment recovery could increase economic vacancy for a sustained period. Furthermore, expenses such as property taxes could drive operating expenses upward as governing municipalities look to recover from deep budget cuts as we move through recession and recovery and into expansion.
How is Coast Equity Partners addressing these long-term risks in their underwriting?
We are staying true to our “Law of Averages” approach to underwriting, which has proven to hold-up well through all four quadrants of the market cycle. In other words, our long-term hold strategy enables us to choose the most opportune time to exit the market.
However, to offset future volatility in the market related to economic occupancy and operating expenses, we have increased our baseline annual economic vacancy rate by 10%, our operating expense growth rate by 20%, and our annual reserve impound by 15%.
If you would like to ask us additional questions on our underwriting during this time, please Contact Us.