The upper limits for small apartment buildings barely moved between the first and second quarter of 2020, according to a new one report by Chandan Economics.
Cap rates were down 5 basis points in the second quarter to stand at 5.8%, explained the article posted on lender Arbor Realty Trust's website.
“Cap rates rose 21 basis points in the first quarter and there were concerns that they would continue to rise as the economic downturn continued. However, due to a tug-of-war, the upper limits for small multi-family families remained constant, ”the article says.
Cap rates are influenced by falling risk-free rates as well as operational risk, he explained.
"If both phenomena occur at the same time, the net result is the stability of the cap rate," the article said.
Chandon studied the difference between cap rates and treasury returns to estimate the risk premium for small apartment buildings. Although the spread was the highest level ever recorded in the second quarter, it barely moved compared to the first quarter.
The article states that the real estate market has found stability in times of crisis due to interventions in the CARES law, unemployment benefits and eviction moratoriums. However, there is repeated debate about how resilient real estate cash flows will be when protections expire.
For example, a survey in mid-July found that 39% of renters earning less than $ 75,000 a year had little or no confidence that they could pay their rent in August, the article says. That rate was 5% higher than a poll in mid-June.
In higher income brackets, there are fewer concerns about the ability to pay rent.
"Small multi-family tenants tend to earn less than their large multi-family neighbors, which increases concerns about rental income with this asset class," the article says. “At the same time, small multi-family tenants are comparatively less temporary and less susceptible to home ownership in the medium term. As COVID-19 prompts many young households to rethink their location preferences, the small multi-family subsector could prove to be more resilient to sub-letting and maintaining stable occupancy in the medium term. "
The article warned that because of the many moving parts, there will be an ongoing discussion about how the small multi-family market is handling the risks compared to the rest of the industry.