Tracking Multifamily Tenant Financial Health

GeoPhy’s Tenant Credit Profile reveals varying conditions between regions and building types

Recently, we highlighted how our new Tenant Credit Profile (TCP) can act as an early warning system for your portfolio, help you differentiate between two similar-looking assets, and improve your comp selection. TCP can also be used to understand the divergent impact of COVID across different metros and GeoPhy Neighborhoods.

Credit Scores Blanket Underlying Problems

Looking at the aggregate credit scores of the ~315,000 buildings for which we have data, tenants appear to be doing well. Nationwide, the median score is up seven points since March. Across all quantiles, building credit scores have trended up since June 2019. Average aggregate tenant scores have shown a sharp up-tick since the COVID outbreak in March. (Chart 1)

But how can credit scores rise as unemployment skyrockets?

One reason is that a large segment of the population received stimulus checks and used that to pay down outstanding debt. Another reason is that consumers spent less while sheltering in place which further reduced debt. But another less appreciated reason has to do with the CARES Act legislation.

Recall the CARES Act that Congress passed earlier this year included a number of consumer protections. It requires lenders to offer certain accommodations to borrowers if they’ve been impacted by the pandemic. 

If people lose their jobs or get sick, they have been able to request a payment deferral for their credit card or auto loan from their lenders. That lender isn’t allowed to report them as being delinquent to the credit bureaus. 

These tenants have entered into a “payment holiday” and their credit scores won’t be impacted. They still owe money, but have stopped making payments temporarily. When the CARES Act legislation expires, lenders will be allowed to report delinquencies again. We expect a substantial drop in credit scores across the board when that happens.

Do Payment Holidays Herald Future Pain?

Though “payment holidays” do not affect credit scores or delinquencies, they are, in fact, recorded on credit reports as either “payment holidays” or “natural disasters”.  We’re keeping an eye on the presence of payment holidays and natural disasters on among multifamily tenants. These spiked as COVID took off. (See Chart 2.)

The subsequent rebound in the economy has helped reduce the incidence of these flags somewhat, but they remain multiples ahead of where they were pre-COVID.

More worrisome, holiday flags are showing a dispersion typical of the virus’ impact. Some metro areas and some neighborhoods are suffering worse than others.

In Chart 3, we examine the best and worst five combined based statistical areas (CBSAs) by the average percent of tenants with payment holiday in multifamily properties.

There is a pretty wide spread between the top performers and the bottom performers. For the Omaha-Council Bluffs CBSA at the top of the chart, the percent of multifamily tenants that were on payment holiday has increased approximately 350%. Even a great performer like Salem, Oregon has seen holidays increase of approximately 250% from a low base. Note that it is currently higher than where all but one of these CBSAs was before COVID hit.

Size Matters 

Much of the positive press around rent payments has come from the NMHC’s Rent Tracker index. Recent research shows that the NMHC index skews to Class A and Class B properties. TCP data aligns with those findings.

We examined the drop in credit scores for large buildings (>40 tenants) and small buildings (<40 tenants). Among large buildings, CBSAs nationwide averaged 4.3% of properties seeing a 15-point drop in credit scores over the last six month. The average for small buildings was about 13.2% of properties. Keep in mind that a 30-point drop represents a doubling of the risk of default. Default risks are increasing, especially in smaller multifamily properties.

Looking at the spread of worsening credit scores between large and small buildings within CBSA may point to another difficulty. Among the CBSAs with the 10 largest spreads, half are college towns: Knoxville, TN; Columbia, SC; Springfield, MO; Durham-Chapel Hill, NC; and Eugene-Springfield, OR.

Interested in finding out what TCP might tell you about areas you’re exploring? Contact us. We’d love to demo TCP and discuss how TCP can fit into your analyses of regions and properties.


Read all of our five-part series about GeoPhy’s Tenant Credit Profile:

  • Tracking Multifamily Tenant Financial Health
    GeoPhy’s Tenant Credit Profile reveals varying conditions between regions and building types
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