1) The spread in price between workforce housing and A/B will increase.
This statement ultimately ties to the K-shaped recovery we are seeing, where service jobs and other blue collar jobs have been slower to recover than white collar jobs. In multifamily, I’ve had the opportunity to take a look at a number of workforce housing assets this year and 2020 has been a true test for the competence of the owners of these assets. In some cases, owners are doing a good job of managing their assets – occupancy is high, bad debt is low, rents continue to grow, and expenses are being kept in check. In other cases, mom and pop owners without the proper systems are doing just the opposite – occupancy is dropping, bad debt is high, rents are flat (or even worse, dropping) and the property is in forbearance with the lender. You see less of this dichotomy in the A/B space and mixed with the aforementioned challenges workforce housing tenants have been facing, I believe the cap rates of workforce housing assets will not keep pace with A/B assets.
2) Conversion of other commercial assets into multifamily.
We have a nationwide shortage of multifamily supply. That is a fact. I’ve heard of a few projects in 2020 where folks have purchased distressed hospitality, office and retail assets with plans to convert them into multifamily assets. While in theory this can make a lot of sense, it’ll be interesting to see what the outcomes are for these projects. As easy as it sounds, it is quite the challenge to convert a hotel into a multifamily asset, especially a luxury hotel, which is the exact type of hotel facing distress. I do expect more operators to pursue this strategy in 2021 and beyond, given how cheap these distressed assets may be. It just may make enough sense to pour in massive capex budgets to make these projects work if the cost bases of these assets are low enough.
3) Continued flow out of Tier 1 major cities.
By “Tier 1 major cities,” I point specifically to New York and San Francisco. As we all know, the cost of living has gotten absurd in both cities over the past decade. The first half of 2020 was focused on how employees were taking advantage of “work from home” to move out of these cities and work elsewhere with many making the move permanently. In the second half of 2020, while this trend has continued, we have also started to see major employers shift headquarters or major operations outside of these two cities. Hewlett Packard and Oracle are two major tech companies who are moving their headquarters from the Bay Area to Texas. Goldman Sachs is shifting their asset management division from New York to Florida. Now that some major dominoes are starting to fall, I expect this movement of workers from the Northeast and California into other parts of the country to accelerate. That’s not to say San Francisco and New York are dead forever – they’ll recover at some point to pre-COVID levels but it’ll take some time.