Three months into the pandemic, the multifamily market has managed to grasp onto stability. Rent collections, while down nominally, have remained consistent since April and asset pricing has not adjusted—yet. However, the data is changing month-to-month, and with government relief expiring at the end of July, the fundamentals could rapidly deteriorate.
According to the NMHC data tracker, rent collections were down 3.1% year-over-year in April (97.7% in April 2019 compared to 94.6% in April 2020) and 1.5% in May (94.8% in May 2019 compared to 93.3% in May 2019). For the first six days of June, rent collections actually improved compared to April and May, with collections down only .7% year-over-year (81.6% in the first six days of June 2019 compared to 80.8% in June 2020). It is important to note that the NMHC data focuses on institutional-quality assets with more than 50 units but is light on information for small and independent properties.
How Renters Are Managing Payments
To date, rent collections have been buoyed by the CARES Act. The pandemic unemployment assistance provision provides an additional $600 per week in unemployment benefits and has enabled renters to temporarily meet their rent obligations. Despite rising unemployment, financial hardship and even some calls for the government to intervene and cancel rent payments altogether, the industry has yet to see a material impact on rent, occupancy, or collections.
However, according to online rental payment platform Zego, rent payments made through a credit card have increased 30%, illustrating the swelling rent burden. The next several months will likely put additional strain on landlords with indefinite eviction moratoriums, unprecedented levels of unemployment, and a government social benefits package that will expire at the end of July. As a result, there will almost certainly be a continued decline in rental rates, occupancy, and collections unless serious government relief continues. We are tracking this data closely, and to help you stay informed, we have put together a list of free COVID resources and a helpful guide on COVID-related government legislation.
Apartments Outperform Other Assets
In its first quarter return index, NCREIF, a not-for-profit association that provides transparent performance data for the private real estate investment market, reported “the lowest return since the fourth quarter of 2009 which was the midst of the financial crisis that led to the Great Recession.” While hospitality and retail returns were negative for the quarter, dragging down the overall index, apartments managed to have a slightly positive return of 0.95%. Still, the majority of the economic impact will come in the second quarter as resident relocations cause occupancies and new rental rates to decline further, intimating that the second quarter return index will be even lower when released in July. While multifamily certainly will perform better than the hospitality and retail sectors, the decline in fundamentals will put downward pressure on the industry as long as employment and GDP are struggling.
A Pricing Gap Emerges
The investment sales market has also not yet adjusted to its new reality. Transaction volumes have significantly declined as a result of the shelter-in-place orders and the market uncertainty. This creates a gap between landlord pricing expectations and what new buyers are willing to pay, and in turn, freezes in-flight sales. Compounding this reduction in transactions, fewer banks are lending due to general market uncertainty and the shock to the CMBS markets.
While the multifamily market isn’t in the red-zone, the future is still uncertain. Following the expiration of government relief, the market’s risk exposure to the pandemic will increase later this year, and that will provide more insight into the long-term market disruption.
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