The State of the Delaware Multifamily Industry

A snapshot of operations, investments, and legislation

BY KEVIN M. WOLFGANG

Operational Overview

Like most industries, COVID-19 has had a significant impact, including staffing/vendor issues, supply chain disruptions, and challenging regulatory mandates (such as eviction moratoriums). However, the worst fears of the industry have not come to fruition. This is primarily a result of a massive amount of federal money provided to states for rental assistance to those at or below 80 percent of their county’s area median income that incurred financial hardship because of the pandemic and were in danger of losing their homes.

The money is distributed through the Delaware Housing Assistance Program (DEHAP), administered by the Delaware State Housing Authority (DSHA). Although the administration of the program has had significant “bumps in the road”, DSHA deserves credit for essentially developing this program overnight and negotiating the myriad of challenges that come with administering a program of this magnitude.

The rental assistance funds delivered through this program have been a critical lifeline for tenants and landlords as the industry navigates the pandemic. Through the past 24 months, tenants remained in their apartment homes at record levels, resulting in extremely low tenant turn-over and high occupancy levels. This underscores the reality that Delaware needs more affordable rental housing options and that direct financial rental assistance for tenants is the most efficient way to limit evictions. However, there is concern that the end of DEHAP funding and pent-up turnover demand will result in a significant operational downturn in the future.

Investment Overview

The multifamily industry continues to be extremely attractive to investors who view real estate as a stable and safe place to be in an inflationary and low-rate environment. Nationally, private equity investors now have a total of $287.8 billion to invest in commercial real estate, up both an 11 percent from a year ago and a massive 57 percent compared to the end of 2019—according to Bloomberg, citing Preqin data.

In Delaware specifically, there has been an influx of investment interest from out-of-state investors who are fleeing primary markets because of unfavorable regulatory environments (such as rent control), unfavorable tax policies, and political momentum that places the operational success of the industry at risk. Investors view Delaware as geographically attractive and business friendly with a manageable regulatory environment (although this is in jeopardy—see next section). Although interest rates are trending upward, lenders—including Fannie/Freddie/HUD, life companies, and local banks—remain bullish on most residential real estate and a favorable lending environment persists. This has all resulted in compressed cap rates and record-level pricing on sales with continued robust sales volume.

Legislative Overview

There is a multitude of proposed or pending legislation before Delaware’s General Assembly that would have a sweeping impact on the multifamily industry. Just a sample of such current legislation includes:

• SB 101, which creates a mandatory right to counsel—at no cost to the tenant and funded by taxpayers and/or multifamily industry—and provides attorneys to tenants in all landlord-tenant cases (provided they are under the income threshold), regardless of the merits of their case.

• SB 90 would require all apartment communities to be forced to accept Housing Choice Vouchers (HCV’s) such as Section-8 and all other subsidized programs into their rental communities, even if the property owner has never participated in any HCV program.

• HB 235 makes someone’s housing status a protected class and would likely limit or eliminate the landlord’s ability to utilize previous rental references and rental history in the applicant screening process.

The Delaware Apartment Association (DAA) supports the goals and social initiatives these bills seek to realize, however the DAA strongly disagrees with the terms and conditions of the specific bills as presented and has advocated for more efficient pathways to achieve such goals. These drafted bills (and others) will be extremely detrimental to the economic health of the industry, both immediately and in the long term. Some legislators have failed to fully comprehend the negative effects of these bills to the taxpayers, the industry, and to the tenants. Furthermore, these bills will also negatively impact the availability of “affordable” housing in Delaware, which is already lacking, and will limit reinvestment into an aging rental housing stock in Delaware.

Any and all opinions contained in the above article are those of the author. They are not reflective of the Delaware State Chamber of Commerce’s official position on the bills referenced in this article.

Kevin M. Wolfgang is president and chief executive office of Evergreen Apartment Group.