Major Factors Currently Impacting Multifamily Investing By: Dean Kelker, SVP & Chief Risk Officer, SingleSource Property Solutions The statement ‘real estate investing is not for the faint of heart’ rings ever true in today’s climate. Real estate investing has always been an objective practice, leaning directly on ROI and managing risk. The current political and economic environment presents a series of new and unforeseen opportunities and risks. As a result, investors have been increasingly cautious. Despite the climbing concern, investors can rest assured that they can assess every situation using data analytics to match the existing risk vs. their investment goals. The effects of the pandemic and these new factors must be examined to both mitigate new risks and capitalize on unanticipated prospects that did not exist prior to this event. In order to calm the uncertainty of what the future holds and ensure investors make the right investment decisions, we turn to some of the readily available data, to narrow the investment target to those opportunities that possess the greatest yield potential. Let us identify some of those major environmental factors currently impacting multifamily investing. HOUSING AFFORDABILITY Looking at these factors in the context of commonly available data can bring a more definitive focus to an investment decision in the context of moderating risk and enhancing returns. Markets where housing afford-ability is challenging certainly provide increased opportunity for rental properties as there is typically a larger pool of potential renters. RATE OF INCOME GROWTH VS. HOUSING APPRECIATION Housing affordability also directly ties into the relationship between the rate of income growth as compared to housing appreciation. In those markets where there is a significant imbalance between the rate of housing appreciation and income growth (i.e. income growing at a significantly slower rate than the rate of appreciation in housing prices), housing affordability suffers and conversely creates increased rental opportunities. As a related issue, that imbalance also substantially increases the foreclosure risk in the market which will subsequently increase the potential availability of single-family homes obtainable at attractive acquisition prices to be redeployed by an investor as single-family rentals. UNEMPLOYMENT RATE The market unemployment rate becomes a factor both from the perspective of risk of the investment as well as determining the likely rate of return. The current economic environment presents a good window into how the data must be properly analyzed to reveal the fundamental risk/reward in a particular market. In today’s circumstances, many markets have two unemployment rates; the current spot rate which in most cases is higher than normal, and what I will call a persistent unemployment rate. When the economy was shut down in March there was a national upward spike in the unemployment rate that gradually began to moderate. However, that moderation has been uneven across the country as the economic impact of COVID-19 has been uneven from both a business segment and geographic perspective. Let us look at a market such as Las Vegas—a city largely dependent on travel and hospitality for its economic base. Even as the economy began to reopen, Las Vegas has continued to suffer high unemployment as people have not indicated a desire to return to their previous travel behaviors for reasons of personal health and safety. This has driven the unemployment rate in Las Vegas to what has become a persistently high rate that has resulted in lowered personal aggregate incomes for the residents. High persistent unemployment results in pressure on rents due to declining personal incomes. However, for the investor looking for a longer term holding period coupled with having sufficient financial capacity to sustain a period of suppressed income, high persistent unemployment likely presents opportunities to acquire properties at lower than average prices, yielding higher returns in the longer investment horizon when the property is sold. Therefore, the investor needs to decide whether the reduced short-term income is worth longer-term asset appreciation. FINANCING AVAILABILITY A key element of the investment decision is associated with the availability and sourcing of investment funds. The investor must decide if the funds should come from an internal source or one of the various types of external financing, with the external funds coming from conventional market rate sources or subsidized public sources. Certainly, internally generated investment funds for multifamily housing necessarily compete with other investment opportunities, both real estate and non-real estate. Public sources of financing such as FHA or participation in various government housing programs such as Section 8 or LIHTC programs, establish limitations and requirements on the investor regarding the use and income opportunities with any particular property. The investment analysis of such an opportunity needs to account for many of the previously outlined factors, such as: is there a market for subsidized housing and are the attendant returns within the established parameters of the investor. IMPACT OF COVID-19 RELIEF PROGRAMS The current pandemic has created several unforeseen factors around residential investment such as moratoriums on rent collection, moratoriums on foreclosure, and pass-through of financing moratoriums on to tenants of affected buildings. All these issues have degraded the investment value of residential income property. While most of these policy changes were designed to be temporary, they have been extended as the effects of the pandemic have not abated, resulting in a material level of uncertainty as to when they will end and whether the pre-pandemic investment conditions will return. While the intent of the rent moratoriums was to provide a short term deferral in payments and restore the payments streams in the future, the reality is that for many residential tenants, the ability to pay deferred rents in the future timeframe is likely to be doubtful in the context of the general economic slowdown and widespread unemployment. The investor’s analytics now must reflect both the loss in income, which may impair the ability to make financing payments, coupled with the loss in the value of the asset caused by the diminished income that it is generating. Additionally, in the multi-family rental space, the investor must account for increased costs