The North Texas multifamily industry enjoyed one of the best years on record in 2019 and, before the COVID-19 pandemic–business was flourishing–suggesting that 2020 could be even more prosperous.
In NKF’s Dallas office, more than $1 billion in multifamily transactions closed during the first quarter of 2020. However, when the country was put on pause with stay-at-home orders, transactions came to a virtual halt except for a limited number of deals that were already far along in the sales process. The suddenness of the crisis has presented new obstacles, many of them unprecedented in our industry.
Although several buyers with non-refundable earnest money were not able to close and subsequently forfeited deposits, others have extended inspection periods in the hopes that lenders and third-party consultants on-site will complete the due diligence.
Virtual tours and vacant unit-only inspections are the norm, and, in some cases, sellers are escrowing funds to cover any issues that could arise as a result of being unable to access occupied units.
The multifamily sector is fortunate in that there is still capital in the marketplace, and Fannie Mae and Freddie Mac will continue to fund transactions.
New originations will see tighter underwriting assessments, and we are seeing agency lenders require a 12-month escrow of principal, interest, taxes, and insurance for new loans over 55 percent loan-to-value. Freddie Mac requires nine months of P&I payments, while Fannie Mae requires 12 months of escrow payments for P&I, taxes, insurance, and replacement reserves. Conversely, transactions that are assumptions of existing debt will be easier to close.
The pandemic is causing investors to rethink investment strategies, focusing on those sectors with the greatest future probability of uninterrupted cash flow.
With the retail, hotel, and office sectors having been hit hardest during the global crisis, moving forward, many institutional investors could be challenged about where they can invest. Longer-term, multifamily appears to be positioned most favorably as companies refine their acquisition model, define a more realistic assessment of rent growth and economic vacancy, and determine an exit strategy.
Although there is no parallel in U.S. history for the effects or abruptness of this current economic downturn, Dallas-Fort Worth continues to advance during these unprecedented times.
The city’s economic diversity and willingness to adapt has set the stage for North Texas to reopen successfully. There are signs of encouragement, with May multifamily collections holding up and a continuation of active foreign capital showing interest in the market. While there is few new construction starts leading into next year, this will help facilitate the absorption of existing transactions in the construction pipeline and aid in reducing construction costs as a result.
Dallas-Fort Worth is a great place to live, and multifamily is a great industry within which to work. As a team, we are confident that the future will continue to be prosperous for both.
Brian J. O’Boyle Sr. is founder and vice chairman of Newmark Knight Frank’s Dallas office, as well as a partner in the firm’s national seniors housing group.