Multifamily investors, owners and operators typically focus their attention on rent payments and vacancy rates. But the COVID-19 virus, subsequent economic shutdown and unemployment claims from more than 40 million Americans have everyone looking at the bigger picture to gain insight into the future performance. We spoke with Kimberly Byrum, a principal with Meyers Research, a provider of data and trend forecasting for real estate developers, to discuss her prognosis for multifamily properties.
Q: Is a V-curve-shaped economic recovery realistic?
Byrum: I've been through four major economic downturns during my career and seen a bounce back every time. We're still lagging in numbers for this one right now, but I think if we see 75% of restaurant workers come back, then we'll see jobs in manufacturing, education and healthcare come back, too. We'll definitely see the economy back by 2022 at the latest, but probably much sooner.
In every previous downturn, the people holding lots of product and risk are the ones who struggle the most. But the first guys who go back in and start investing and developing always look smart. They look crazy at first, of course, but then they look smart later.
Q: What's the most overlooked economic indicator investors should watch?
Byrum: You can't watch just one thing to understand what's happening to multifamily properties, but probably the most important indicator is the absorption rate of new Class A buildings. An absorption rate of 20 to 25 move-ins per month is really good. Even pre-COVID we were seeing a rate of about 18 to 20 new leases per month, mostly because companies were struggling to hit their construction target dates. We're still at 18 to 20 per month now, which is good. When the energy crisis hit Houston, the pace dropped from 18 down to 14 per month, and we're nowhere near that now. We're also not likely to see giant rent drops.
Q: What are you watching in the multifamily sector?
Byrum: Besides absorption rates, we're looking at concessions offered by owners. Right now, a one-month-free concession is pretty standard, especially while construction is still happening. A red flag would be if we started to see three months of free rent in a market, but we're not seeing trends go that way at all.
We also track rent changes for new leases and renewals. We're not likely to see a big push to raise rents on renewals this year because landlords want to keep their tenants right now. Overall, I don't expect to see strong rent growth this year.
Q: Do you anticipate regional differences during the recovery?
Byrum: We've already seen some regional differences because construction was stopped in some places and not others. On the West Coast, some marketing and leasing stopped for a couple of months because construction was stopped, but in places like San Antonio there was no slowdown at all.
We monitor U-Haul data to track where people are moving, so that will tell the story of whether people will move out of some of the hardest hit cities the way some people are expecting. We're already seeing migration to smaller cities like Boise, Salt Lake City, Colorado Springs and Austin, but it takes time for big companies and employers to make moves. Momentum creates momentum though. Look at Frisco, Texas, for example. There were 9,000 Class A apartments not that long ago and now there are 20,000 Class A buildings because there's an agglomeration of large companies in that submarket.
Q: Is there concern homeownership rates will rise and threaten multifamily rents and occupancy rates?
Byrum: Homeownership is a financial decision, not a lifestyle decision. Our surveys show that most renters say they aren't ready to buy because they don't have a down payment or their income isn't high enough. Nationally, about 20% of renters move out of an apartment to buy a home each year. Even if that went to 25% it wouldn't hurt the multifamily sector much.
Q: How do you think apartments should be designed to make them "quarantine durable" if people are required to stay home again?
Byrum: I think builders may need to reconfigure their one-bedroom units to add space for a home office. The average home office takes up about 100 square feet, so even a 50-square-foot niche could be a home office in some cases. Another option is to create space in common areas that residents can reserve or rent for a private office out of their apartment but in their building. I think a mix of units with office space and carving out some space from common areas can make buildings more attractive to millennials and to downsizing baby boomers.