Are High End Neighborhoods Really More Stable?
Whose tenants are more likely to be financially stressed: High- or low-rent neighborhoods?
It’s no surprise that many multifamily tenants are under financial stress. It may surprise Class A and B property owners, however, how many of their tenants are under stress.
We’ve been using our Tenant Credit Profile data to determine whether multifamily tenants have been deferring their loan and credit line payments. (We call this “payment holiday”– read more here.)
Consumers with payment holiday deferments are 2.5 – 3x more likely to miss payments in the future compared to consumers who never deferred payments. If they miss their credit card payments, how much time do you have before the rent check bounces?
Wealthy, Not Well
We sought to understand whether neighborhoods with high or low rent are more likely to have tenants defer payments.
For our analysis, we ranked each neighborhood versus the rest of its MSA. We assigned each neighborhood a percentile. Then we identified properties that had a big jump in tenants on payment holiday since the pandemic struck. Specifically, we identified all properties in each neighborhood that saw a ≥5 point jump in the percentage of tenants who had a payment holiday for at least one loan or credit line. [Note, to avoid the numbers jumping around too much, we only included neighborhoods with more than 10 properties.]
Here is what we found: Neighborhoods with the biggest increases in payment holiday are also neighborhoods with above median rent for the MSA. Nearly 30% of the properties in these “High End” neighborhoods saw large jumps in tenants on payment holiday. (See chart below.)
The “Affluent” are the exception. The top 10% of neighborhoods ranked by rent “only” had about 25% or properties see a significant jump.
Note in the previous chart that buildings with the bottom 20% of rent for an MSA had lower rates of payment holidays than even the Affluent. The blue line for the last two deciles is lower than for the first. What’s going on here?
We label neighborhoods “Workforce” for the bottom 40% of rents in an MSA. We suspect a large proportion of tenants living there were already delinquent on their loans and credit lines. (They’re likely also behind on their rent.) A previous delinquency disqualifies borrowers from payment holidays.
Delinquencies lead to poor credit scores. If our suspicion is right, we would expect that lower rent neighborhoods also have lower average tenant credit scores. That’s exactly what we found.
Rent Still at Risk
Throughout the COVID Epidemic, the NMHC Rent Tracker has shown that Class A and B buildings have continued to fare well. Class C properties, on the other hand, have seen much larger increases in missed rent.
But the really bad news for Class C may already be on the table – or at least for the lower rent neighborhoods those properties serve. We aren’t seeing a holiday surprise for Workforce property owners.
If your property is in a high end neighborhood, however, the message is to be prepared. Your tenants may have been paying their rent. There is a good chance, however, that they are under financial distress – and your rent is less secure than you believe.