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Q1 2020: Multifamily Markets and COVID -19 Update

March 31, 2020

Dear Friends,

It’s hard to believe that a small particle less than 120 nanometers in diameter would spell the end of one of the longest and strongest bull markets in history.  The coronavirus has upended economies and populations around the world and will almost certainly be looked back on as one of the most significant health and economic events of the 21st century.  Governments and medical infrastructures globally have struggled to keep up with the spread of the virus and respond to its impact on populations.  The one positive is that we are now seeing an aggressive, multi-faceted campaign aimed at addressing containment of the virus and responding to its economic impact with substantial financial relief policies. 

On the healthcare front, companies as diverse as Honeywell, Jockey International, My Pillow, P&G, UTC, and Ford have stepped up to produce or donate medical equipment to overwhelmed state health care systems.  President Trump sent the 1,000-bed hospital ship USNS Comfort to New York, which remains one of the hardest hit cities.  On the economic front, the administration passed an $2.2 Trillion economic recovery and relief package addressing a broad cross-section of the economy and Treasury Secretary Mnuchin along with both parties indicate a willingness to supplement this economic relief as needed.

Aggressive financial support of individuals will be critical in managing through this event because at its core the virus is going to drive a severe demand contraction that severely strains individual and corporate finances alike.  Goldman Sachs’ prediction that US unemployment claims could spi

ke to 2 million in the second quarter were already surpassed with last week’s 3.3 million jobless claims report.  Forecasts for the ultimate level of unemployment and job losses are all over the map but it’s fair to say they will dwarf almost anything on record. Sobering as this is, the one caveat in our view is that the worst of the impact will be relatively short-lived by historical standards given the normal life-cycle of viral outbreaks.  

We expect a robust and rapid recovery once the economy is allowed to reopen.  It’s therefore critical that the government do everything in its power to bridge this economic downturn in order to minimize the long-term damage to individual and business balance sheets.  The risk of overspending looms large in the background, especially given current deficit levels, however, if there’s one saving grace it’s the historically low interest rate and inflation environment.  The alternative of not doing enough is far worse and the lessons taken from the ‘07-’09 financial crisis are surely front of mind for both political parties.

As an essential business, Tidegate Capital remains fully operational in oder to provide housing for current and future residents. Much of our support functions are outsourced and there’s little direct contact with residents that our managers experience that is associated with managing existing properties.  We have been in contact with most of tenants across our property portfolio and few see an issue meeting rents through April and May, at which point we expect the economy should start to reopen.  We also take comfort in the fact that the B-space workforce housing that Tidegate Capital focuses on is likely to weather this downturn far better than real estate portfolios exposed to the high-end A-space, not to mention hotel, mall, and office spaces.

Renovations continue to move forward at Flamingo Park in West Palm Beach and the acquisition of Somerset Place in Columbus is an exciting new opportunity coming to fruition in the next few weeks. While the timing may seem challenging, the reality is that new multifamily product will not be coming on-line in the area. Fortunately, the lease up period in Columbus will commence when the strong rental market begins in a few months, and when it is expected that CV-19 should begin to taper off, even if only slightly.

Anecdotally, we have signed a number of new leases with tenants at our properties.  Whilst we’d be naïve in thinking that our tenant base won’t be impacted by the coronavirus and its economic fallout, it is important to highlight that home-buying is likely to get more challenging over the next few quarters leading to increased demand for rental properties.  Additionally, lenders are already scaling back loans for the construction of new multifamily projects which will further limit available housing going forward. Workforce housing will remain in strong demand and available units will be well below equilibrium levels. 

Wishing you all the best during these challenging times.

Tidegate Capital 


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