While headwinds are still out there for the multifamily property sector, especially in a handful of markets, the sector has been “defying gravity” since the COVID-19 pandemic started, according to a presentation by Kimberly Byrum, a principal with Meyers Research, a provider of data and trend forecasting for real estate developers. Considering the dramatically high levels of unemployment, industry analysts anticipated equally high levels of unpaid rent. Yet, since the pandemic started, rent has been consistently paid at levels close to previous years. Ninety percent of renters made a full or partial rent payment by August 20, according to the August 20th National Multifamily Housing Council (NMHC)’s Rent Payment Tracker. That is just 2.1% less than the number of renters who paid by August 20, 2019.
Occupancy Steady but Demand Down
Apartment dwellers appear to be “frozen in place,” said Byrum, with demand for new units stalled but occupancy rates holding in most markets. In the Midwest and the South, occupancy rates are actually above long-term averages, and in the Northeast and the West, occupancy rates are normal, according to Byrum’s research.
- In the Midwest, occupancy rates during the second quarter were 95.0% compared to the long-term average occupancy rate is 93.4%.
- In the South, occupancy rates during the second quarter were 94.6% compared to the long-term average occupancy rate is 93.9%.
- In the Northeast, occupancy rates during the second quarter were 96.4% compared to the long-term average occupancy rate is 96.1%.
- In the West, occupancy rates during the second quarter were 95.2% compared to the long-term average occupancy rate is 95.0%.
The only outlier market that is performing at an all-time low occupancy rate is San Francisco. Yet even there, Byrum said, when she drilled down into the potential for more renters to leave the city, the number of available units and the pipeline of new rentals coming online, she doesn’t anticipate a major impact on the multifamily market.
However, Byrum said, there has been a steep overall drop in demand year-over-year for apartments, particularly in the Bay area, where demand dropped 235% in the first and second quarters of 2020 compared to that same period in 2019. In Los Angeles, demand declined 155% during that same period. In San Diego, apartment demand was down 84% and in Las Vegas demand was down 80%. Because of the pipeline of new apartments becoming available, Byrum anticipates a correction of 100 to 200 basis points in occupancy rates in some cities.
Regionally, demand declined 84.4% in the West, 55.0% in the Northeast, 41.1% in the Midwest and 39.3% in the South. However, the decline in the West was primarily driven by California cities and the decline in the South was primarily driven by steep demand drops in Miami and Orlando, Byrum pointed out.
Possible Flight to Suburbia
An ongoing story since the pandemic began is that both renters and homeowners are fleeing cities and thronging to the suburbs, but Byrum said that the numbers don’t necessarily bear out that theory. Certainly, renters can save substantially by moving from San Francisco to another city, for example, and that is happening among people who can work remotely. But Byrum’s research found that lower income households are more likely to move within the same geographical area where they already live. Among people who have moved during the pandemic, 37% moved because they couldn’t afford their housing, so they may have moved in with family or friends or to a less expensive apartment.
Byrum analyzed occupancy rates and rent growth in urban and suburban markets and found a mixed bag of evidence. Generally, she said, most markets are holding steady with both occupancy rates and rent growth.
The markets with the steepest occupancy declines (above 2%) are urban submarkets in Orlando, San Francisco, Houston, Austin and Oakland. Byrum attributes this primarily to a big pipeline of apartments coming online now. In markets with rent drops, Byrum said, the decline is more about absorption and not pushing rent higher for new product.
Overall, the multifamily market is performing with an unexpected strength, particularly for buildings with tenants in place who are paying their rent and opting to renew leases.