Covid-19 Multifamily Underwriting Stress Test Scenarios

[Ryan Daigle]

What does multifamily underwriting look like now given what we know so far of the impact COVID-19?

I know there are very few new transactions going under contract right now given the huge amount of uncertainty that still exists. It's natural to see both buyers and sellers moving to the sidelines right now. And, any transaction that does initiate will have a 6-8 month close delay (closing guidance from Freddie/Fannie). Still, we're facing a new reality at least for the short term and I'm curious what changes you're incorporating into your underwriting?

Here are the assumptions I've built in:

• Flat to slightly negative rent growth for 2020 and 2021
• Double total vacancy in 2020 (at least 15%-20%)
• At least one year of reserves (Fannie/Freddie may now require 18 months!)
• 20bps/year of exit cap rate expansion (minimum of one percent expansion if hold time > 3 years)

What do you think. Rational? Too optimistic? Too conservative?