What impact will COVID-19 have on the rental demand for multifamily housing?
Updated: Apr 8, 2020
Prior to COVID-19, Los Angeles was already experiencing a severe affordable housing crisis.
What impacts will COVID-19 have on this crisis?
At a broader level, CBRE’s 2019 Global Investor Intentions Survey states that a quarter of investors cited residential as their most favored investment sector, surpassing offices for the first time. CBRE’s ten-year projection for multifamily housing notes that “urban populations are booming, and cities are grasping to improve housing, transit and environmental sustainability.”
LA is no exception. LA County was already short 516,946 units needed to meet existing demand for affordable housing. Indeed, the crisis commanded Governor Newsom to sign the first state-wide rent control in California’s history, AB-1482, which limits rent increases across the state to 5% per year plus the local rate of inflation (around 3%).
In addition to LA’s housing shortage, the surge in renters and urban living led to local and state government drastically liberalizing urban density planning with measures such as:
Transit Oriented Community (TOC) density bonus - Allows for properties within a mile radius of public transportation to receive massive density bonuses and reduced parking requirements.
Accessory Dwelling Unit (ADU) Ordinance - CA passed a new ADU ordinance which allows for a third unit to be added to a lot zoned for a single family home. The change makes it possible to have a SFH, ADU and junior ADU on a lot originally zoned for one single family home.
What does this all mean post-COVID?
On April 3, Institutional Property Advisors (IPA) conducted its Actionable Insights Multifamily Market Webcast. In attendance were representatives from NMHC, TruAmerica, PGIM, and Equity Residential Property Trust. The panel emphasized its focus on tracking data over the last three weeks in order to provide real-time insight into this rapidly-changing market.
All panelists agreed that COVID-19 impacts will only exacerbate the housing crisis, noting that “this isn’t a demand issue but rather a supply issue.” Some of the reasons include:
Social distancing rules will delay construction and there’s already a significant demand for quality housing.
The difficulty with navigating laws/permit process and availability of capital and debt to finance development deals will obviously not help supply constraint, further increasing demand for housing.
It’s too early to tell if there is a supply chain problem, but if this occurs, we will very likely see even more of a shortage of affordable housing.
Though there will certainly be short-term stings (loss of jobs, evictions, missed rent payments), the IPA panel agreed that the demand for rental housing and the demographics before the crisis are still there and probably strengthened after the crisis. They point to:
The pre-crisis propensity to rent was already at an all time high so first-time home buyers will favor renting over home buying for at least a couple of years.
It will be harder for people to come up with a down payment and the historical high of kids living at home will increase in the aftermath.
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