While Pittsburgh rang in 2020 to the tune of a roaring real estate market, the Coronavirus has created unprecedented challenges for landlords across the nation, and Pittsburgh’s real estate market is no exception. Transactions have slowed to a crawl across the U.S. as investors try to make sense of how the disease will impact the economy at large, their target regions in particular, and real estate as a whole.
Given Birgo Capital’s exposure to Pittsburgh real estate, we are monitoring indicators across the region in an attempt to project likely outcomes for the metro area’s real estate. Our first funds were founded on the belief that Pittsburgh’s economy is uniquely resilient, offering structural downside protection and stellar stress test characteristics. Indeed, during the Great Recession, Pittsburgh’s performance was impressive compared to the rest of the nation. While single-family transaction volume slowed, it was the only major metro that did not experience a decline in home values – Pittsburgh residential properties actually continued to increase in value during the crisis. Compared to fifteen benchmark cities, the MSA also had a smaller increase in unemployment, better GDP growth, and significantly less bankruptcy filing growth (9% versus a staggering 62%).
This recession isn’t like the last one. We are facing a global pandemic, not a subprime mortgage crisis. Will the relative resilience that Pittsburgh enjoyed during the last recession translate to similarly impressive performance through this one? Let’s examine several regional economic factors to determine how Pittsburgh multifamily real estate is likely to perform during the current crisis and in the years to come.
Pittsburgh’s Single Family Residential Will Probably Be Fine
According to the National Association of Realtors chief economist Lawrence Yun, Pittsburgh went into the lockdowns in the midst of a housing shortage. As per the West Penn Multi-List, 10% fewer homes were listed for sale in 2019 than in 2018, and through all of 2019 the area had the least number of homes listed for sale in four years. New development has not kept up with the job growth that Pittsburgh has experienced over the last several years.
Yun said of Pittsburgh, “When there is a major housing shortage, prices don’t go down. Builders have not been building in relation to all the job creation in the past several years in the Pittsburgh region. Also, homes that come into the market are inspiring bidding wars for some homes, which also is a testament to Pittsburgh’s housing shortage.”
While the lockdowns undoubtedly affected demand, and the extent to which the demand curve has shifted (or the length of time that it will stay shifted) remains to be seen, early indicators support a thesis of pent up demand and a strong residential housing recovery as lockdowns ease.
Pittsburgh’s Economic Drivers Will Again Prove To Be Resilient
Housing supply/demand dynamics aside, COVID lockdowns have sent shockwaves through the economy, and unemployment has spiked nationwide. During the last recession, pain was disproportionately felt in areas that experience volatility in housing prices and that rely heavily on financial services as a main driver of their regional economies. The current recession, however, was not caused by a disruption in a single sector such as the mortgage crisis or the dot-com boom – the virus’ effects are far more widespread, and few industries will go completely unscathed. Still, some sectors such as retail, tourism, and hospitality stand to be hit particularly hard, and areas that rely heavily on such drivers will be disproportionately affected relative to areas driven by currently thriving or resilient industries such as technology and healthcare.
While Pittsburgh is not immune from the current systemic rise in unemployment, neither is it disproportionately affected, and in the medium to long term, several of her key economic engines such as healthcare and higher education stand to benefit from probable secular shifts.
To be sure, Pittsburgh’s submarkets that depend on energy jobs, like Washington and Beaver County, will undoubtedly suffer as the Saudi/Russian conflict brings the price of oil to near zero (many watched in disbelief as the price dipped into negative territory, albeit very briefly). Still, energy jobs account for only 1% of the local economy, and regional sector diversification is one of the most attractive reasons we have chosen to invest in Pittsburgh.
Indeed, it is difficult to eavesdrop on any conversation about Pittsburgh’s economy without hearing about the oft-touted “Meds and Eds.” From Carnegie Mellon University and the University of Pittsburgh to UPMC, Highmark, and Mylan, the region is home to globally recognized bastions of higher education and medical innovation that have long been a primary driver of the local economy as well as a significant factor in its resiliency. While these industries are typically viewed as recession proof, experts have doubts about the stability of higher education and medicine through a global pandemic. Will students risk infection and return to campuses in the fall? What will happen if there is another viral wave and subsequent shutdowns? Additionally, hospitals were forced to halt profitable elective surgeries to focus on preparing for a coming onslaught of COVID patients, and many are already reporting associated financial issues. Are Pittsburgh’s darling industries in trouble?
While there is no doubt that higher ed will be impacted by the virus, we believe this will likely be an archetypal scenario where the rich get richer and the poor get poorer. Small institutions that rely heavily on a regional pool of students will likely have trouble weathering this storm, particularly if there is an admissions crisis in the fall. While Western Pennsylvania has many of these modestly-sized institutions, they are not the primary driver of the “Eds” portion of Pittsburgh’s economic base. While not immune from turbulence, world-renowned Pitt and CMU will likely come out of the crisis even stronger. Upcoming fall semester aside, high school students aren’t going to stop going to college anytime soon, and as smaller schools become insolvent, demand for larger providers of higher education will surely increase.
Similarly, Pittsburgh isn’t regarded as a strong medical market simply because it has good hospitals (although it certainly does), but rather because of its institutional healthcare infrastructure. While hospitals have suffered temporary economic setbacks due to COVID, demand for healthcare innovation in the brave new world of global pandemics is likely to skyrocket well into the foreseeable future. Indeed, UPMC was one of the earliest research institutions to announce a potential COVID vaccine and is poised to emerge as an even stronger global leader in healthcare innovation. Pittsburgh is well positioned to benefit from these dynamics, and we believe its economy will enjoy resulting multiplier effects.
Vacancies in Multifamily Real Estate Will Rise, But Only Slightly
Unsurprisingly, Costar predicts an increase in Pittsburgh’s multifamily vacancy. However, they forecast an increase from just under 6% to approximately 7% -- still well below the national forecast of 7% to roughly 9%. While higher than current vacancy levels, this marginal rise in vacancy is unlikely to cause huge problems for landlords across the region – it’s difficult to imagine a capital stack so stretched that it cannot weather a 1% rise in vacancy, particularly in a region characterized by generational ownership and little to no leverage.
Pittsburgh Multifamily Rent Collections will Beat Other Target Markets
As landlords everywhere know, when you buy an investment property, you aren’t just buying a building; you’re buying a stream of income. The relative fragility or robustness of said income stream is a primary factor in determining the attractiveness of a given real estate investment. Although multifamily is generally regarded as one of the safest subsets of real estate, not all multifamily is created equal. While many residential investors target coastal hubs and growth markets, housing costs as a function of income are significantly higher in these areas, making them far more vulnerable to income disruptions than more affordable cities like Pittsburgh. For example, the median asking price for a one-bedroom apartment in Miami is $1,995 per month, and the median household income is $48,982. Compare that to Pittsburgh’s average one bedroom asking price of just shy of $1,000 and its median household income of $56,063, and you’ll begin to see why Pittsburgh continues to earn the moniker “America’s Most Livable City.” In absolute terms, it’s obviously far easier to come up with $950 to pay rent than it is to come up with $2,000, especially when personal income takes a hit. As such, Pittsburgh’s multifamily cash flows stand to weather economic shocks better than those of alternate geographies.
Additionally, the blue-collar workers disproportionately affected by the shutdown are the very same workers receiving significantly increased amounts of government assistance, and, as we have reported, are continuing to pay rent despite the challenging economy. The last several months have demonstrated that workforce housing is effectively backed by the full faith and credit of the United States government, and much of Pittsburgh’s housing stock falls into this category.
Asset Values May Actually Increase
As we discussed while detailing our acquisitions posture, investment sales volumes have already slowed to a near halt nationwide, and Pittsburgh’s experience has been no different. In the past three months, a little over $27m of multifamily property has traded in the region, but the $25m sale of 100 Anderson Street in late March accounts for nearly the entirety of that figure. During normal times, Pittsburgh’s multifamily sales volumes are already some of the lowest in the nation, and pandemic-fueled investor skepticism has only increased this regional dynamic.
While it is still too early to definitively determine how COVID will impact multifamily valuations, our anecdotal experience indicates that cap rates in the area are holding steady, and may even compress as capital seeks the relative safety of apartments compared to the riskier, harder hit hospitality, retail, and office sectors. Multifamily collections continue to be strong in spite of the economic turmoil, and cash flow interruptions are less threatening a concern than they were at the beginning of COVID lockdowns.
For the time being, Costar still predicts asset prices to temporarily decline due to the recession. However, just as Pittsburgh historically hasn’t experienced huge price appreciation, so too is it somewhat immune from price dips experienced by the rest of the economy. While Costar’s market economists project a nearly $40k per unit drop in the national price of multifamily sales, Pittsburgh’s projected decline is closer to $20k per unit – a much shallower V curve.
Still, our recent and ongoing in-the-trenches conversations with brokers and owners in the region tell a different story. Multifamily deals that had stalled are beginning to pick back up, asking cap rates haven’t adjusted upward, and investor sentiment continues to brighten. Capital is still chasing yield, and with so many asset classes affected, multifamily shines as a bastion of safety in otherwise turbulent waters.
While Pittsburgh isn’t often included in the conversation with high-growth coastal hotspots, these challenging times are those during which she shines the brightest. From sector diversification to the affordable cost of living, Pittsburgh continues to be well positioned to weather difficult times. We look forward to monitoring developments in the region and sharing our insights in the weeks to come.