Note: This article was originally posted in October 2020 but has been updated with new data.
By Caitlin Walter, Ph.D.
- Caitlin Walter is vice president of research at the National Multifamily Housing Council (NMHC) in Washington, D.C. She can be reached at email@example.com.
We are eight months into the COVID-19 pandemic in the United States and are now officially in a recession. How is the apartment industry faring? It’s decidedly a mixed bag.
A variety of data points suggest that while the industry is largely holding on, there are still fundamental issues that must be confronted. And while there are different issues to face depending on the segment of the rental industry, all are facing real potential hurdles.
The Rental Industry Is Big, Diverse and Being Affected in a Lot of Ways
Acknowledging the diverse nature of the rental housing stock and how it’s managed is critical to understanding the varying ways in which the industry is feeling the impact of the pandemic.
The Urban Institute has estimated that both apartment owners and residents in two- to four-unit buildings are more likely to face distress than owners in buildings with five or more units—both owners and residents in the smaller properties are more likely to be lower income than the same groups in larger buildings. Those owners are also less likely to have access to financial assistance. And, more important, one non-payment or vacancy is felt more acutely in a four-unit building than a 20-unit building.
There are about 44 million rental housing units in the United States. About one-third (34 percent) are in single-family unit buildings, with 17 percent in one- to four-unit buildings, and almost half (45 percent) of the units in buildings with five or more units. These different structures can be subject to disparate trends; hence, focusing on just one structure type can be misleading. To add to the potential confusion, analysts sometimes use the term “apartment” to refer to rather different structures: buildings with just two or more units; buildings with five or more units; even buildings with 50 or more units.
At NMHC, we define what we mean with specific terminology noted in either in a footnote or a source line. While often presented in fine print, this information offers an invaluable distinction when parsing out the overall health of the industry because trends can vary by product type.
Whether a property is professionally managed or managed as a “mom and pop” can also play a factor in not only identifying trends, but also in the collection of data. Professionally managed apartments tend to be properties with a larger number of units, although they cover a broad range rent classes, from affordable/subsidized to naturally occurring affordable to high-end, Class A homes. What sets these properties apart is that they are more likely to have property management software with standardized rent collection methods like electronic payments, whereas mom-and-pop properties often do not.
Consumers Overall Are Struggling—and Renters Are Not Immune
Throughout this pandemic, we’ve seen record unemployment numbers and various data points suggest that families are struggling to make ends meet—renters included. A recent survey from the Consumer Finance Protection Bureau found the median amount of money that needs to be saved for an emergency was $10,000; the median amount actually in consumers’ savings accounts was between $1,000 and $3,000; more than half (51.6 percent) of respondents had less money than they thought they would need for an emergency.
Many economists are expecting a “K-shaped” economic recovery—this means that those who were already financially stable are likely to continue to be so, while those who were already struggling will likely face even greater challenges. This also means that for this economic recovery in particular, it is even more necessary to drill down beyond aggregated numbers to learn the true depth of problems.
One-quarter of all renters (those in all types of housing) reported in the most recent Household Pulse Survey that they had borrowed money from friends or family to meet their spending needs (all spending, not just rent) in the past seven days; 31 percent had used money from their savings or selling assets; and 34 percent had used credit cards. Breaking the responses down by type of housing (single-family, five or more units, or even 50 or more units) yields similar results, indicating that within each segment of the rental industry, there are groups that are struggling, while there are other groups that are not.
And it shouldn’t be surprising that renters are feeling the impact of the downturn. NMHC’s most recent Research Notes found that apartment residents (those in buildings with five or more units) are more likely to work in service sector industries such as tourism and hospitality, which have been some of the hardest hit during the pandemic.
Apartment Industry Performance Metrics Are Mixed
Collection Rates Remain Consistently High, But Not for Everyone
The Census Household Pulse survey and other data points suggest that renters are struggling to make ends meet—so why does other data indicate renters are largely making their rent payments?
The first November NMHC Rent Payment Tracker release showed that the share of households in professionally managed apartments that made a full or partial payment in the first six days of the month was down just 1.1 percentage points from the same time period in 2019. Just this one metric may make it seem as though the apartment industry is faring relatively well.
However, that difference expanded slightly with the mid-November data, which showed rent payments running 1.6 percentage points behind the same period last year. Throughout the pandemic, this trend of rent payments lagging by a percentage point or two has been consistent. We’ll have to wait to fully understand where the month’s collections will ultimately settle, but these results indicate that the numbers can change quickly from week to week.
But to get a complete picture of the health of the industry, you can’t look at these data in a vacuum. While the NMHC Rent Payment Tracker shows rent payments are generally holding up for professionally managed apartments, it only tells one part of the story – its captures 52.2 percent of apartments. In contrast, the Census Household Pulse Survey data clearly show that, although renters are largely paying their rent, renters as a whole are struggling and facing hurdles.
The Census Household Pulse Survey questions related to rent are for all rentals—providing additional insight into the behaviors of renters living in more product types than just those that are professionally managed. The survey indicates that from Oct. 14-26, 84.3 percent of all renter respondents were current on their rent payments. The trend is similar looking at only the five-plus or 50-plus-units universe, where 87.1 percent and 86.2 percent were current, respectively.
So, circling back to the initial question–why are payments still holding up? There are a few possible reasons. Apartment operators have been very proactive throughout the pandemic to work with residents in financial distress. Another reasonable explanation is that a resident will do whatever they can to pay their rent, cutting out other expenses or finding other ways to raise funds.
Rent Payment Data Is Only One Piece of the Puzzle; Other Performance Metrics Vary Tremendously by Geography
Still, while rent payments are mostly holding up, other metrics in the apartment industry are not faring as well.
Nationally, Yardi Matrix reported a decline of only 0.6 percent on a year-over-year basis in monthly rent for professionally managed apartments in their database, which may indicate continued strength in the overall market. However, it also masks some significant disparities in performance by market—New York and San Francisco, for example, had year-over-year rent declines of more than 5 percent.
Moreover, three markets in the South—Dallas/Fort Worth, Atlanta and Houston—accounted for almost one-fifth (17 percent) of the net increase in demand in the third quarter, according to RealPage. This is contrast to net moveouts of 11,705 and 3,637 units in the New York and San Francisco markets, respectively.
Looking at performance within metro areas, urban core properties continue to have more difficulty than suburban properties. RealPage reported the first year-over-year rent decline in urban core properties for the first time since early 2010 in the second quarter of this year, and the deterioration continued through the third quarter. This is in contrast with suburban properties, which saw modest rent growth during the same period.
This trend is not relegated to professionally managed apartments, either—CoStar, which tracks asking rents at smaller rental properties as well as professionally managed properties, notes the same trend of falling rents in urban areas and rising in suburbs. And while this is a phenomenon that has been occurring for several years, RealPage notes it has become particularly more acute during COVID.
Yardi Matrix provides a breakdown of conventional apartments by “lifestyle” and “renter-by-necessity.” Looking at the performance by metro area, rent growth in the renter-by-necessity asset class is outperforming the lifestyle asset class in most locations. RealPage segments assets by Class A, B and C, but noted a similar pattern for much of the pandemic—Class C saw moderate rent growth in the year-ending September, while units in Class A and B were negative. However, Class C apartments saw rent declines in October of 1 percent after many months of economic pressure.
New Construction Will Likely Exacerbate Existing Issues in the Near Term
Will new deliveries match the current demographic choices? The answer is no… at least not right now. There is a lengthy timeline that is involved with building new apartments, particularly for properties in urban-core areas, which often required more significant site/design work than garden-style properties in suburban and exurban areas. This means that properties currently near completion have been underway since way before COVID-19 and are more likely to be lifestyle products located in urban core areas rather than the suburban and exurban product that are performing best right now.
While most industry professionals expect demand to return to the urban core post-COVID, the introduction of these units in the near-term to areas already facing rent declines and spiking vacancies, is likely to contribute to further concessions and rent declines. Indeed, RealPage data indicates urban core areas with large additions to the inventory reported the largest declines in year-ending rent performance in the third quarter.
However, if there is a silver lining to this, it’s that this new supply could potentially temporarily ease some affordability constraints in the near-term post-COVID recovery. And in the long-term, fundamentals suggest demand will return to these areas once the pandemic has eased.
It’s Unclear What the Future Holds, Especially Without Government Relief
While the apartment industry is mostly faring well, especially compared to other real estate asset classes, there are clearly segments of the industry that are still struggling. And while little can be done in the short term about rent growth and vacancy changes, there are ways to better address the financial struggles many apartment residents are encountering.
Apartment owners and operators have been proactive about communicating with residents about their housing needs and challenges and working with them to find options, often putting in place more flexible payment plans. However, more broad government support is needed to keep residents housed and the housing market stable.
While federal lawmakers have enacted relief measures intended to address the immediate public health concerns related to renters—namely, the Centers for Disease Control’s eviction moratorium—they do little to address a renter’s underlying financial distress, and do nothing to help prevent even more renters from falling behind. For example, even with a federal eviction moratorium, back rent will still be owed eventually, leaving struggling residents with debt and damaged credit, if they are unable to pay the full amount.
Recent research from Ganong et al., has shown that the relief Americans were receiving from unemployment benefits is dwindling quickly, and we are quickly approaching a point where more people will not be able to pay their rent. And in the face of increased COVID infections across the country, it is clear that the only source of addressing that underlying pressure is the government—we need Congress and the Administration to work quickly to provide this critical financial support to struggling renters. Only by addressing the underlying financial pressure faced by millions of Americans will we be able to fully recover from the economic damage caused by this pandemic.
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