Rent at Risk: The Calm Before The Storm?
New US Census Bureau data undermines the rosy picture of rent payments painted by several recent multifamily announcements.
Lenders and investors are trying to make sense of current and future rent impacts from recent health, economic, and social crises on multifamily commercial real estate by tapping a firehose of data. The public and labor markets provide contrasting indicators, making it increasingly difficult to filter between noise and information to find out what is really going on.
The National Multifamily Housing Council (NMHC) Rent Payment Tracker shows that 95.1% of renters paid their May rent by the end of the month. This payment ratio is not as bad as expected: in May 2019 96.6% of renters paid their rent. In recent earnings calls, various REITs have cited a 95-99% collection rate for April and May multifamily rents. In early June, the S&P 500 had rebounded significantly from its selloff earlier this year and the NASDAQ hit all-time highs.
On the other hand, employment numbers show a picture that is beyond grim. Just over 20.5 million Americans were drawing continued unemployment insurance payments in the week ending June 6. In total, there were 20 millions fewer people working at the end of May compared to the end of February. Common sense tells us that many of these people are tenants and all need income, a draw on savings, or access to credit to pay rent.
The Mortgage Bankers Association recently credited stimulus checks with filling the gap between previous payroll income and unemployment income. A recent spike in US consumer savings may extend the amount of time consumers can continue paying rent. While this creates a bridge to recovery, it also creates a cliff for the apartment market. Stimulus checks are already used up; savings may soon be gone; credit cards will max out.
Part of the current puzzle with conflicting data seems to be a problem of sample bias. REITs and large institutional investors that participate in the NMHC Rent Payment Tracker focus largely on Class A properties. These buildings target a high-income population more likely to have savings or significant credit card balances to use for contingencies. These income groups have also been less affected by the waves of layoffs, working in relatively “safe” professions, often from home.
Fresh, Forward-Looking Rent Insights
The US Census Bureau has recently started to track the economic impact of COVID-19 with a weekly survey that contains both current as well as forward-looking questions. It provides fresh, rich, and highly relevant data to identify what’s going on with people across the income spectrum. Most importantly for the apartment industry, it asks renters if they paid last month’s rent and how confident they are about paying next month’s rent. This survey offers comprehensive insight across all levels of income as well as the first forward-looking information available in the market about rent.
The most important finding of the new survey shows that more renters are not paying rent than just the NMHC survey indicates. NMHC cites April rent collections at 94.6% compared to the Census survey’s April rent payments reported at 80.1% nationwide. The May rent collections from the NMHC rent tracker sit at 95.1%, with nationwide reported rent payments from the Census nationwide at 81.4%. Crucially, the data confirms a recent study by the Harvard Center for Joint Housing Studies indicating households in small multifamily units – which attract lower income tenants – struggling to pay rent. According to the Census survey, those further down the income scale are indeed having the hardest time making rent payments:
July Rent Payments Not Helped by Reopenings
With six surveys conducted so far, we are able to draw both a snapshot of current sentiment on ability to pay as well as its evolution over time and across different locations. We had expected renters’ confidence in ability to pay next month’s rent to recover and improve in states that opened up in May; that does not seem to be the case for most locations yet. While nationwide sentiment predicts July rent collections at about 70%, the range by state and by metro ranges from about 50% to about 90%:
Most Rent-Resilient and Most At-Risk Metro Areas
Several of the 15 largest US metro areas’ populations are showing resilience to the virus’ economic impact. Here’s a list of the five cities whose tenants feel most confident in their ability to pay rent:
- San Francisco
- Washington, DC
And here are the largest metro areas on the other end of the curve, still showing precariously high rent-at-risk among tenants in their markets:
- New York
- Riverside, CA
Splintering Market Bears Close Attention by Multifamily Investors
Finally, we charted cities and states based on reported May rent payments and anticipated ability to pay July rent. The market is splitting into areas that are relatively insulated, areas in recovery, and areas with material and growing risk. We are not out of the woods yet:
With new and often conflicting data coming out on what seems like a daily basis, we will keep track and monitor both the reported payments as well as the sentiment over time.
Market Insights for Multifamily Underwriting / Risk Management
Any survey has limitations. This survey represents forward-looking sentiment and reported behavior. Sentiment and reported behavior are compelling, but neither is the same as dollars in the bank.
This new data series also has no baseline in a non-distressed environment. What percentage of New York renters would say they couldn’t pay next month’s rent during a good economy?
With a weekly sample of about 100,000 responses drawn from a random sample of all possible respondents, this survey provides a solid representation of what’s happening across the US. We believe that such information is useful for investors and lenders when underwriting assets. More importantly in the current environment, we believe it is useful to assess the risk of assets in the portfolio or on the balance sheet.
GeoPhy has therefore integrated this data into Evra – our platform for assessing a multifamily property’s value, viability, and the quality of its surrounding area. As I write this blog post, the Census Bureau’s data runs through June 9. Going forward, we’ll continue tracking the impact of post-COVID-19 state openings on multifamily rents as well as the impact of the ongoing mass protests. Sign up for a trial of Evra to try it for yourself.