COVID-19: Impact on Apartment Demand (Webcast Summary)

To help our customers and the multifamily community as a whole through the current COVID-19 crisis, we’ve launched a series of discussions, COVID-19: Multifamily Impact and Performance Insights, centered around its impact on the rental housing industry with the latest data, expert insights and actionable measures stakeholders can take to minimize fallout.

This is a condensed summary from the first webcast in the series, COVID-19: Impact on Apartment Demand, broadcast on March 18, featuring RealPage^® Chief Economist Greg Willett and RealPage VP and Deputy Chief Economist Jay Parsons.

ARE WE ENTERING A RECESSION?

With the onset of COVID-19 and its economic ramifications, it feels like we’re back in 2008-2009. However, recent strength in the economy and the apartment market means that if we lose some ground from where we are now due to the pandemic, we can still land in decent shape.

The typical view now is that GDP will backtrack in 2Q. Most analysts are predicting contraction of 1.5% - 2%. However, some renowned economists are going deeper. Goldman Sachs projects a contraction of 5%.

If the spread of COVID-19 comes under control quickly, the economy is expected to stabilize in 3Q and start to grow again in late 2020 to early 2021. This wouldn’t be the first recession with a short, sharp decline and then a quick comeback in the right direction.

METROS MOST IMPACTED

Local economies in tourism hot spots like Orlando and Las Vegas will struggle—where hospitality accounts for 28% of the Vegas job market and 20% for Orlando. Orange County, San Antonio and San Diego also have somewhat outsized exposure to a downturn in hospitality.

Port cities are also a concern with potential disruption of goods entering and leaving the country. The biggest port in terms of cargo moving through is along the Mississippi River, between Baton Rouge and New Orleans, where agricultural products flow from the Midwest to the rest of the world. There’s also vulnerability in the ports of Los Angeles and Long Beach, the New York/New Jersey areas, and the Gulf Coast ports in Texas.

RESIDENT RETENTION & RENEWAL RENT GROWTH

The chart below shows renter retention rates at initial lease expiration over the past few years. Annualized through February, that retention figure was roughly 53%—higher than it’s ever been. We expect that number to climb even more this year, given the proven behavior that many people stay in place during uncertain times.

However, there’s a bigger potential headwind impacting net demand for apartments—household composition. With less money to spend on housing, residents are more likely to take on roommates. We’ll monitor lease transaction data to see if the number of lease signers per unit starts to climb after trending downward through much of the last decade.

Another figure to keep an eye on is renewal lease pricing. The average renewal lease price bump remained steady at around 4.5% - 5% over much of the past decade. We expect renewal rent growth will slow to some degree.

The timing of the net demand slowdown is significant because the nation’s leasing volume normally peaks during 2Q of each year. RealPage is monitoring key data points such as website visits and call center inquiries to assess the impact of COVID-19 on likely move-in demand in the next few months.

NEW SUPPLY SURGE & RENT DISCOUNTING

Developers are reporting that approximately 371,000 market-rate apartment units are scheduled to complete in 2020—a 50% boost from 2019’s new supply. The actual number will likely be substantially less due to delays from supply chain and labor issues.

Class A renters with income challenges could look to move down to lower-priced apartments. For the newest communities under development, driving new deliveries through initial lease-up could also be difficult. Rent discounting is likely to be widespread among properties building their initial resident bases, with concessions possibly growing in the existing upscale projects.

Class B properties are best positioned for any slowdown—given the limited supply of quality, decently located apartments and catering to a more stable job base than Class C. Move-downs from Class A properties may also be another hedge for Class B.

Class C is typically hit hardest when a recession is severe, as residents of these properties don’t have any financial cushion when something goes wrong. On the plus side, Class B and C properties are starting from a strong position with very few vacancies to date.

THE DELINQUENCY FACTOR

A growing list of cities have put in place temporary bans on evicting renters who are delinquent on rent. That list includes most of the major Coastal markets, like New York, San Francisco, Miami, Seattle and some interior cities like Denver and San Antonio.

De facto laws could also take effect in other cities without formal policies because many municipal courts have shut down.

Historically, investors have tended to view the big Gateway Cities like New York, San Francisco and Los Angeles as low-risk investment options. That has the potential to change in a significant way as these larger progressive cities adopt renter-friendly policies like rent control and eviction limits.

INVESTOR IMPACT

The bigger question for investors now is deal flow. Opinions expressed at PREA and other recent industry events suggest capital flows could increase. While investment returns anticipated for U.S. real estate are not ideal, they still exceed expected yields for other capital placement options.

But what happens if investors aren’t gathering together? Does uncertainty lock us into a wait-and-see game where investment slows down? Dealmaking does stall until you get some sort of feel for what the bottom of the market will be. Once that happens, property trades should return quickly, though new construction capital might take a little longer.

Our partners at Real Capital Analytics created this graphic showing 2020 commercial real estate activity in the Americas versus Europe and Asia Pacific. You can see a real impact in Asia Pacific, where COVID-19 first hit hard.

LONG-TERM OUTLOOK

Demographics suggest strong apartment demand for another decade or so. The number of folks in their early 20s is smaller than those in their late 20s. That means growth in the prime renter group isn’t quite as fast as it was earlier, but there is still growth.

For Greg Willett’s and Jay Parsons’ complete discussion on the COVID-19: Impact on Apartment Demand, including their answers to viewer questions, watch the webcast on demand anytime.