This article is sponsored by Yardi Matrix
After years of almost flawless market conditions, the covid-19 pandemic abruptly created unprecedented operational and financial hurdles for the multifamily industry. Little more than a month into the shutdown, 33 million US workers have been furloughed or laid off, second-quarter GDP is expected to drop upwards of 25 percent and many potential tenants are either unable or unwilling to venture into public places.
On a dime, the conversation in multifamily changed from how to deal with soaring rents and supply growth to questions about construction moratoriums, whether tenants would pay rent, sign new leases or even be able to visit properties. Suddenly the industry faces declining demand, lower rents and increased concessions, uncertainty about rent payments and a slowdown in development activity, all amid an imperative to refocus operations on cleanliness and the need to socially distance.
The consensus rose-colored forecast has been downgraded, but by how much? Will the economy and necessary social changes be a short-lived phenomenon or is the industry headed for a long downturn? The chance of a quick V-shaped recovery seems less likely as the infection count rises, but preliminary data on metrics such as rent payments, apartment searches and visits and approved tenant applications indicates that the impact of the pandemic might not be as severe as feared.
Leasing activity surprises on the upside
Stay-at-home orders were implemented in many states just as the peak spring rental season was starting, a time of year when more people move into apartments and most rent growth occurs. Concerns about demand are two-fold: will household formation suffer from job losses and will people feel free to relocate while afraid of getting infected through public interaction?
Demand has waned from many sources. With most office employees working from home, corporations are backing out of luxury lifestyle leases. Some young workers that relocated to major metros for jobs – many sharing apartments in co-living arrangements – have headed back to families after getting furloughed.
The outlook for student housing for the summer and fall semesters is bleak, as many universities are likely to hold classes online. Young adults entering the workforce don’t have the jobs and income to strike out on their own. Beyond the economics, the physical act of moving has become more complicated. Visiting properties, hiring movers and buying furniture requires interactions that some tenants are eschewing to avoid potential exposure to the deadly virus.
Given these conditions, executives at large multifamily firms worried that signing new leases was going to be near impossible this spring. However, the early signs are that – after an initial steep drop – rental activity is picking up, albeit not to where it would have been if there was no virus but far better than the depressed levels anticipated.
Data from Yardi’s operational software products found that as of the last week of April, total apartment prospect volume – the number of people actively looking for an apartment – had recovered to mid-February levels, before the social distancing had started in most of the country. Total prospect volume dropped about 25 percent between mid-February and mid-March. Compared with mid-February, late April prospect volume was up 4 percent for high-end units and 1 percent for midrange units, and down 1 percent for workforce units.
Not unsurprisingly, online listing views have grown considerably, according to Yardi’s RentCafe service. After falling 20 percent year-over-year as of early March, online listing views rose to 672,000 in the last week of April, up 16.7 percent over the same week a year earlier. Online views don’t necessarily translate into signed leases, but the fact that potential tenants are searching is a good sign.
Yardi operational software also found some momentum in approved applications in all but the luxury segment. Compared with mid-February, by the last week of April approved applications rose 16 percent for lower-end workforce units and 10 percent higher for mid-range units, while luxury (discretionary) unit approvals were 3 percent lower. That represented a huge improvement from mid-March, when approved applications had dropped by about 25 percent for mid-range and workforce units, and 40 percent for luxury units.
Not all the indicators were positive. Notices from tenants to vacate rose between mid-February and late April by 29 percent for luxury units and 4 percent for mid-range units, while dropping 15 percent for workforce units, according to Yardi data. Meanwhile, during that same period the number of available units rose 21 percent for luxury units, 7 percent for mid-range units and 1 percent for workforce units. The clear implication is tenants are being budget conscious, either by seeking units that they can afford or moving to lower-cost units.
That’s bad news for the many new deliveries either being leased up or about to come online, 90 percent of which has a luxury price point. Deliveries will fall short of expectations, however, due to the difficulty of getting supplies and keeping workers on site will increase construction timetables. After four years of 300,000-plus deliveries, we forecast roughly 250,000 units to come online in 2020 and 2021, and just over 200,000 in 2022. Few properties that have not yet broken ground are likely to get started anytime soon.
Assessing whether tenants will keep paying rents
The financial wherewithal of tenants is a huge question with so many unemployed. April’s collections ended up being less of a problem than anticipated, with 92 percent of tenants making payments, only 4 percent less than a year ago, according to the National Multifamily Housing Council. Through May 6, just over 80 percent of tenants made rent payments, only 1.5 percent less than a year ago, NMHC said.
The ability to make rent payments is being boosted by the federal emergency aid package that pays an additional $600 per week to regular state weekly unemployment benefits to unemployed workers through August. That puts unemployment benefits above the average state wage in 37 states, and more than 90 percent of the average state wage in all but three states. Although the benefits won’t be enough to help every tenant, and in some states furloughed workers are having difficulties in applying for benefits, the aid should go a long way toward reducing what otherwise would have been a major problem for the multifamily industry.
If the federal aid helps most tenants to make rent payments over the next few months, a bigger challenge for the industry may well be demand and rent growth. We expect that the lease-up period at new properties will be extended by months, forcing owners to lower rents or offer significant concessions to lure new tenants.
That dynamic will filter to existing units, starting with higher-priced properties and spreading into mid-range and workforce properties. Most property owners are extending most leases with little or no rent increases and/or offering inducements such as gift cards, rent deferrals and payment plans to keep tenants from leaving.
In April, the first full month that felt the effects of the pandemic, the average rent in the US declined by $8 to $1,465, down 0.4 percent month-on-month, according to Yardi Matrix. Rents fell by 0.7 percent for luxury units and 0.4 percent for Renter by Necessity units. The biggest declines were mostly concentrated in high-cost coastal metros – such as Queens (-1.2 percent), San Diego and Los Angeles (each -0.9 percent), Boston, Brooklyn and San Francisco (all -0.8 percent). Inland, sharp declines were also felt in Denver (-1.0 percent), Kansas City (-0.9 percent) and San Antonio (-0.8 percent).
In the short-term, metros likely to be the most impacted fall into several categories. One is metros with concentrations in industries disrupted by the decline in travel, such as Las Vegas and Orlando. Another is high-cost coastal metros in which rents are unaffordable for newly unemployed, such as New York City, San Francisco, Los Angeles and Boston. Metros reliant on the energy industry, such as Houston and Midland-Odessa, face a difficult recovery.
Another group of metros to be affected are the fast-growing lifestyle metros that have large influxes of new supply. Examples include Dallas, Raleigh-Durham, Miami, Nashville and Austin. These metros have strong prospects long-term, but the steep downturn will make it difficult to fill the large number of new units and create a ripple effect on rents downstream.
It should be said the country is in the early stage of a health crisis unlike anything seen before. How businesses will reopen and how willing consumers will be to go back to routine activities until a covid-19 vaccine is available is unclear. While it is too early to come to firm conclusions, and the multifamily industry has much to do to deal with the crisis, the pain will be manageable in the near term.