Navigating the Headwinds: Multifamily Amid COVID-19

Concerns are rising about whether the multifamily sector, including its renters, can sustain economic security as new daily COVID-19 cases remain stubbornly high. Even as the economy stumbled through much of the spring and summer, the apartment sector generally stayed on its feet. While tenant performance measures have taken a marginal hit, they have stabilized and held up better than early predictions had suggested.

Rent collections have ranged between 76.6% and 82.2% since April, according to Census Bureau estimates. In turn, both property-level cash flows and cap rates have remained resilient. However, as coronavirus cases surged across the U.S. in July, it became apparent that the country’s speedy return to normalcy would not occur.

Renters’ supplemental unemployment insurance in the CARES Act expired on July 31. While a recent executive order reinstates some of these benefits, they are only partial and are dependent on state-level participation. In addition, uncertainty remains regarding the order’s implementation and legality.

If stimulus efforts bridged the gap in renters’ needs during the past few months, an end to those payments could spell future trouble. The most recent Weekly Household Pulse Survey, which covered the week ending July 21, reported that 34.1% of all renters were pessimistic about making August rent. That statistic rose 3.1% compared to four-weeks prior.

While rent is typically an expense that households prioritize, the combination of scaled back benefits and the beleaguered state of the labor market may make housing’s inelastic nature a non-factor.

On the investment side, market participants across the board are proceeding cautiously. According to the Arbor-Chandan Economics Q2 2020 Small Multifamily Trends Report, initial estimates of loan-to-value ratios (LTVs) on small multifamily loans saw a near-vertical drop of 360 bps between the first and second quarters. LTVs in the broader multifamily market saw similar declines, dropping back to 2016-levels.

The pullback suggests that buyers and lenders alike are applying careful calculus in the deals they consider.

Historically low interest rates have led to a surge in refinancing requests across all residential real estate, with both multifamily generally and the small multifamily subsector reporting similar trends. However, in a potential market-muting event, on August 13, the FHFA announced a price adjustment for refinances, tacking on a fee equal to 0.5% of the loan for lenders, beginning in September. This additional cost will partially pass through from borrowers to renters.

Additional locally enforced restrictions affecting workers without income alternatives will further hinder the ability of tenants to pay rent. Looking again at the Household Pulse Survey, the subset of unemployed renters has only underperformed the market by an average of 9.0% from May 5 through July 21. This data supports the idea that supplemental unemployment benefits have sustained tenant rent payments.

If the performance spread between employed and unemployed renters widens, it will reflect the consequence of an insufficient safety net amid an economic downturn. As detailed by the Urban Institute, both landlords and renters will feel the impact of a growing housing finance shortfall.

The think tank’s study suggests that smaller building owners and renters, low-wage earners, and people of color will stand as the most adversely affected if the sustained recession is met with policy inaction.

As more than 32.1 million Americans were receiving unemployment benefits, including Pandemic Unemployment Assistance at the end of July, even if a vaccine were made available immediately, the U.S. economy would not just snap back to 2019 levels. Much of the damage already done is permanent. It will take longer for labor markets to return to full health than it did to deteriorate, meaning tenant performance concerns may extend beyond the current scenario.

At least there appears to be a legislative consensus that the country needs further accommodative housing measures to bridge the gap from crisis back to health. In the meantime, however, headwinds are still in the forecast, and weathering the storm remains the sector’s status quo.