COVID-19 and Apartment Demand
- Renters are staying in place.
- Operators will prioritize tenant relationships.
- Class B property will have certain advantages as investments.
Businesses require agile strategic planning, especially during unforeseen circumstances. Real estate owners and operators will need to continually update their information on how the coronavirus is impacting the industry. RealPage presented a March 18 webcast on the effects of COVID-19 and apartment demand. Their economists reported that, thus far, the multifamily market remains stable.
Renters Staying in Place
RealPage’s Chief Economist Greg Willett described a strong record in the multifamily market. “We’re now holding onto renters more than we ever have in the past,” he said. “When initial leases come up for expiration over the past few years annualized through February, that retention figure is roughly 53%. It’s higher than it has ever been.” Willett added many people tend to stay in place during uncertain times.
But in a softening economy, people often find roommates. Doubling up, with multiple signees on leases, has trended downward in the last decade. He noted that household composition will be a number to watch.
Operators Will Prioritize Tenant Relationships
The average gain in the renewal of lease prices has remained at 4.5% to 5.0% over the past 10 years. With future rent increases, operators will likely prioritize holding onto reliable tenants. “We should see that renewal lease price growth comes down a little bit, sacrificing a few dollars to maintain those really solid renter relationships,” said Willett.
With the Great Recession in 2008 and 2009, multifamily landlords gave substantial price cuts to new tenants. However, with renewals, rent growth flattened but never “went negative,” according to RealPage’s Deputy Chief Economist Jay Parsons.
Capturing Rental Demand: Class B Advantages
Taking the averages from 2018 and 2019, more than half of the rental demand occurred in the second quarter. The months of April, May and June accounted for 54% of rental demand, Willett noted. The multifamily market is now approaching the second quarter, its traditional peak season. Analysts will be closely watching rentals in the upcoming months to record the effects of COVID-19 and apartment demand.
Willett predicted widespread rent discounting with new construction lease-ups, as owners and operators work to build their tenant bases. He also expects concessions at high-end apartments to compete with nearby new product that could lure tenants.
Class B property is the best positioned for an economic slowdown, according to Parsons. “There’s a limited supply of quality, decently located apartments,” he said. “Class B generally caters to a more stable job base than does Class C. Plus, the rent gap between A to B is now larger than ever compared to other cycles.”
Willett added tenants in Class C properties will most likely face greater hardships, having less of a financial cushion to weather economic downturns.
Gateway Cities: Advantages and Challenges
Investors traditionally considered major coastal markets such as New York, Los Angeles and San Francisco as low-risk options. However, several of the more progressive cities have adopted more renter-friendly policies. This has included rent control and changes to the practices of screening new tenants. With the COVID-19 pandemic, these protections have extended to banning evictions of tenants who cannot pay rent. Parsons pointed out that multifamily property, unlike the retail and commercial sectors, usually guarantees some income stream. That’s because the multifamily market, for the most part, seldom has a zero percent occupancy rate. But the possibility of a higher delinquency rate with rents will require forethought in planning.
Economic Forecast Depends on Tackling COVID-19
Willett reviewed historical economic cycles to shed light on the current situation. In a typical recession, unemployment rises approximately 2.0%. With the recent, unusually low unemployment of about 3.5% to 5.5%, Willet calculated a recession with the loss of roughly three million jobs. In contrast, during the 2008 and 2009 recession, the U.S. labor force shed about nine million jobs.
“We have recent strength in the economy and in the apartment market,” he said. “That means that we can give up some ground from where we are right now and we would still really be in OK shape.”
Willett acknowledged that the economic picture is changing. He quoted economists as predicting a GDP contraction of 1.5% to 2.0%. Willett added Goldman Sachs projects a 5.0% contraction by the second quarter. He continued that optimists believe the country will quickly control the spread of COVID-19. If that occurs, the economy could stabilize in the third quarter and begin to grow in the final months of the year, Willett stated.