US multifamily has been relatively unscathed during the covid-19 crisis, thanks in part to a federal stimulus, including a $600 per week unemployment supplement that has helped millions of jobless Americans pay their rents.
However, that unemployment stimulus ended on July 31 and gridlock in Washington, DC has failed to yield a full replacement. A White House executive order will use emergency funds to pay some unemployed people $300 per week, but only a handful of states have been approved for that extra relief. With Congress in a month-long recess, a comprehensive package would need to pass in a special session or be pushed off at least until the fall.
“It’s the perfect storm of stimulus checks being spent, additional unemployment benefits running out and a lot of the Paycheck Protection Program money that was keeping people on payrolls being spent,” Sean Burton, chief executive of Los Angeles-based multifamily manager Cityview, said. “It’s really devastating to a lot of folks and we’re worried about what that means going forward.”
Making matters worse for apartment owners, many states and local governments have halted evictions and adopted other policies to limit landlord recourse in cases of non-payment. These measures have been especially restrictive in growing West Coast markets in California, Oregon and Washington, where anti-landlord sentiment was fomenting even before the current crisis.
“We’ve actually seen situations in our communities where people have paid rent and not had enough food to eat.”
Avanath Capital Management
The consensus among multifamily managers interviewed by PERE was in the short term, owners would work with tenants who are struggling to pay rent by offering reductions or deferrals. Longer term, these firms believed that the market will normalize, with tenants who are unable to pay moving out and replaced by those who are downgrading either from an owned home or a nicer rental.
Some tenants, even those minimally affected by the pandemic, have used these relief efforts as an excuse to stop paying rent, Todd Henderson, head of Americas real estate for the German investment firm DWS Group, said. “In the renter by choice area, where many of the jobs haven’t been impacted, we’re seeing what’s impacting their willingness to pay rent is more a fact that the landlord doesn’t have the tools to force them to pay it.”
Steady so far
Still, non-payment, be it by choice or necessity, has been rare. By the middle of the month, roughly 60 percent of the multifamily managers surveyed by the real estate software specialist Juniper Square had collected at least 90 percent of their July monthly rents. Similarly, seven large managers in the space told PERE their collections have ranged between 95 percent and 98 percent since April, though some have granted discounts to tenants with demonstrated hardships from the pandemic.
This is consistent with findings from the National Council of Real Estate Investment Fiduciaries, which saw the average apartment rent fall a few percentage points last quarter, though not nearly as much as retail and hotel rents, which dropped by 12.68 percent and 48.73 percent, respectively.
Of the more than 10,000 affordable units managed by Avanath Capital Management, only about 100 have been granted lease modifications and another 100 or so have stopped paying rent altogether, Daryl Carter, chief executive of the California-based company, said. “Most of our renters have been extraordinary in weathering this time and paying rent,” he said. “We’ve actually seen situations in our communities where people have paid rent and not had enough food to eat.”
Other managers in this space have seen similar consistency from their tenants, though not all renters have faced such dire choices. In fact, home confinements paired with government stimulus efforts seems to have improved the financial situations of many Americans during the pandemic. At the end of April, after blanket stimulus checks were issued to most taxpayers, household savings rose to 33 percent of discretionary income, up from the two-decade average of 6 percent, according to an analysis from the University of Texas at Austin McCombs School of Business. Household debt as a percentage of GDP and debt service payments as a share of discretionary spending also fell to historic lows, the study showed. Even retail sales were up 1.1 percent year-over-year by the end of June, according to US Census data.
Likewise, steady multifamily payments were reflected in the NCREIF Property Index, which tracked income returns of 1.01 percent in the space last quarter and 1.05 percent in the quarter before that, just a few basis points off the first and second quarter of 2019.
Yet, it is unclear how much of that will dissipate if direct stimulus is not reinstated or replaced. The US job market has improved since hitting a record high unemployment rate of 14.7 percent in April, but joblessness remains staggeringly high at 10.2 percent. While Bob Hart, chief executive of California-based TruAmerica Multifamily, is optimistic about a strong economic recovery once the virus is contained, he said government intervention will be necessary until then.
“Without the stimulus it’s going to be very tough for that lower rung of folks who have no income,” Hart, whose company manages 43,000 units nationally, said. “The market needs that to maintain the kind of collections we’ve seen.”
This past quarter, New York-based manager Nuveen closed $327 million of new commitments for its US Cities Multifamily Fund, an open-end core vehicle that invests in apartments geared toward renters making between 80 percent and 100 percent of the average median income in nine select markets. The commitments put the vehicle over $1 billion.
Nikita Rao, the managing director who oversees the program, said investors have turned to the fund as a source of income returns in a low interest rate environment otherwise bereft of them. With that in mind, apartment valuations, which fell 1.64 percent last quarter, are of little concern. “Investors are knowledgeable and aware of volatility from an appreciation perspective, but there are differences in valuations across different strategies in the sector,” Rao told PERE. “Middle income valuations have seen some modest declines but generally the fundamentals have held up really well.”
Ben Maslan, managing director of the Los Angeles-based advisory group RCLCO, said his clients also are undeterred by potential short-term disruptions for the same reason they were attracted to the property type before covid-19: strong market demand and limited housing supply across the board. In fact, he said, further economic fallout from the pandemic could serve to bolster the sector.
“It remains to be seen where the stimulus ends up and what happens in the second half of 2020, but so far we haven’t seen a lot of deterioration in multifamily operating performance,” Maslan said. “If anything, this recession will drive greater demand for rentership as you see declines in income from families, declines in their balance sheets and difficulty addressing debts.”