Despite all the chaos and uncertainty caused by the coronavirus, the apartment industry overall seems likely to survive through the end of 2020 with little permanent damage. Most apartment properties are still fully occupied and most of the renters at those properties are still writing rent checks.
That said, there is a subset of renters – millions, in fact – that may have missed payments. And, at the same time, millions of people remain unemployed while doctors continue to diagnose an uptick in new COVID-19 cases. If the disease continues to spread during the cold weather months, health and government officials may have to order businesses that had just begun to re-open to close again.
“The big question mark for the near term is simply what happens with the current health crisis and, in turn, what that means for the speed of economic recovery,” says Greg Willett, chief economist for RealPage, Inc. “COVID-19 and the economy are two sides of the same coin. They really can’t be separated.”
Occupancy rate still high for apartment properties
Apartment communities continue to be fully-occupied on average across the U.S. The percentage of occupied apartments sagged just 30 basis points to 95.3 percent in the second quarter, according to Marcus & Millichap.
“This may not reveal the true economic vacancy as eviction moratoriums allowed renters to occupy units despite failing to meet obligations,” according to Marcus & Millichap. On September 4, 2020, the federal Centers for Disease Control and Prevention issued a new order that protects renters from eviction through the end of 2020. Earlier in the pandemic, a patchwork of eviction moratoriums also protected renters from being evicted.
However, the fundamental strength of the apartment market will likely help protect it. The U.S. still has a massive shortage of places to live. In recent years, housing developers including both single-family and multifamily builders have finished far fewer units of new housing than the number of new households counted by the U.S. Census, according to John Sebree, senior vice president and national director of Marcus & Millichap's Multi Housing Division.
“Near-term performance weakness is likely to show up in dropping occupancy, especially as we move into the cold weather months, when leasing activity slows,” says Willett. RealPage expects the percentage of occupied apartment to drop at least 150 basis points during the cold weather months between now and spring 2021.
“That only would take the rate a hair under the long-time historical norm,” says Willett. “We went into this recession with occupancy near its all-time high. So there’s room for the numbers to backtrack some without a big problem emerging.”
Most renters still pay their rent, though millions have fallen behind
However, the U.S. economy continues to struggle, with close to a million new claims for unemployment announced every week through September.
“With only minimal additional unemployment benefits currently forthcoming, the multifamily industry remains cautious on collections in the coming months,” says Doug Ressler, manager of business intelligence for Yardi Matrix.
By September 27, more than nine-out-of-ten apartment renter households (92.2 percent) had made a full or partial payment for the month, according to the Rent Payment Tracker survey by the National Multifamily Housing Council (NMHC), which gathered data on 11.4 million professionally-managed apartments from five leading property management software systems. That’s more than a quarter of the 43 million rental apartments in the U.S.
“Large apartment companies say the vast majority of their residents are paying their rent,” says Sebree.
“Those who can’t pay have tended to move out on their own, avoiding a run-up of debt,” says Willett. “That pattern of behavior, which is consistent with what was seen in past recessions, suggests the eviction numbers will remain manageable.”
However, data gathered by the U.S. Census shows a much darker picture: millions of renter households have already missed rent payments, probably in small apartments properties that are not included in data like NMHC’s Rent Tracker.
Of the U.S. households that live in all types of rental housing units, one-in-six (16 percent) failed to pay their rent in August. That’s more than nine million households out of the 60 million counted in the Household Pulse Survey, week 14, from the U.S. Census. Of those 9.8 million households, 1.4 million believe they could be evicted in the next two months.
“There could be more problems in small properties with mom and pop ownership or in rental single-family homes,” says Willett.
Weak demand for apartments and more frequent renewals at flat rates will continue to weigh on the growth in rents. Effective rents for apartments grew just 0.9 percent on average in the second quarter to reach $1,415 per month, according to Marcus & Millichap.
“Sliding occupancy points to some likely rent cuts, especially in the luxury product segment,” says Willett. “There will be lots of rent giveaways at the properties moving through initial lease-up, and there are many of them since we’ve got about 600,000 units under construction.”
So far the strongest apartment markets have been places where average rents are not too far out of reach of people earning an average income. “More affordable areas hold the advantage over their expensive counterparts,” says Willett.
For example, the percentage of occupied apartments is falling quickly some of the most expensive submarkets of the most expensive cities in the U.S. The percentage of occupied apartments in and around downtown San Francisco fell 6.5 percentage points by the end September compared to beginning of the crisis. Occupancy rates also fell by more than 3 percentage points in the urban core of Seattle and Boston and by close to 2 percentage points in the urban core of Chicago, Los Angeles and New York, according to Real Page.
In contrast, less expensive real estate markets, including suburban submarkets and smaller cities have been less hurt in the crisis.
“Markets in the Sun Belt and Midwest are positioned to outperform their counterparts in the Northeast and along the West Coast,” says Willett. “That’s mainly because of the pricing differences.”
Investors return to bid to buy apartment properties
However, investors still seem to believe in the apartment markets – at least compared to other investment alternatives. Investors continued to complete $5.8 billion per month in deals to buy apartment properties from April through August, according to Real Capital Analytics. That’s much stronger than the activity through the worst months of the Financial Crisis, during the last Great Recession.
Some experts say the activity is increasing, as more investors bid to buy apartment properties.
“There has been an avalanche of deal flow – a lot of investment post Labor Day,” says Ryan Davis chief operating officer at Witten Advisors, based in Dallas. These potential buyers seem eager to deploy capital before the end of the year. They have been making offers to buy apartment properties – without major discounts – in markets that have not seen too much damage.
“Investor confidence in multifamily is high,” says Davis. “They are in a mindset that there is going to be some deterioration, but that is a blip… as long as you can survive.”
Chaos and inaction in Washington, D.C.
Congress adds a whole other layer of uncertainty to the outlook for apartments for the remainder of the year. Earlier in 2020, apartment experts like Marcus & Millichap seemed confident that the federal government would pass another round of support for the U.S. economy. However, Congress let support like the enhanced unemployment benefits created by the CARES Act to expire at the end of July.
“Some federal government financial help for those who have lost their jobs certainly would help,” says Willett.
The House of Representatives passed a $3 trillion proposal in May – the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act – that would include $100 billion in emergency rental assistance. Democratic legislators planned to follow that proposal with another large bill spending trillions of dollars on infrastructure, including recapitalization of public housing. However, proposals from the Republican-led Senate add up to much less money.
As the fourth quarter of 2020 began, economists don’t expect the political parties to resolve their differences before the November Presidential election – though negotiations had restarted again in the first week of October.
“But that’s certainly not something that either individual households or property owners are counting on,” says Willett.