If I were to tell you that ~40% of your residents were unemployed, what do you think that would do to rent collections? Would you believe me if I told you multifamily collections were more or less unaffected through May? Probably not. So what’s going on?
One of the sad realities of the coronavirus is the disproportionate impact it has on those at the lowest income and education levels. Most wealthy individuals can work from home and escape areas most hard hit by the virus. The individuals putting themselves at risk by working are doing so because they must.
A majority of those who have been hit the hardest financially are renters, who occupy the class B and C apartment communities.
In March, during the early days of the pandemic, operators were predicting doom and gloom for the multifamily business, especially workforce housing. Most operators halted capital projects, reduced expenses, and began to hoard cash in preparation for massive delinquencies. It was the prudent thing to do amongst so much uncertainty. Here’s what I predicted in a blog post on March 22nd.
“Delinquency at our stabilized deals will jump from 1-3% to 10-50% and vacancy will grow from 4-8% to 10-30% over the next 3-4 months. New leasing will come to a screeching halt. With the courts closed and a moratorium on all evictions, residents have little incentive to pay. Residents who have lost their job or had their hours cut are going to prioritize other bills and stop paying rent altogether. We’ll have fewer move-outs and a higher renewal rate, which will buffer the blow slightly.”
However, that’s not how things have played out so far. Leasing momentum has certainly slowed, and retention has been strong, but collections have been shockingly resilient. During the heart of the pandemic, collections have been nearly in-line with 2019.
The strong rent collections are hard to understand and likely too good to be true. While many people in the multifamily business think we’re in the clear, I believe the combination of Federal stimulus and cognitive dissonance is masking the inevitable pain that lies ahead.
There’s a widely held belief there will be a V-shaped recovery, workers who were laid off will go back to work quickly, and things will be back to normal. In fact, 78% of all unemployed Americans expect to be rehired in the next 6 months. However, many of these jobs are gone for good and the companies that do survive may return partially staffed at first. OpenTable estimates that 1 in 4 restaurants won’t re-open and a total of 7.5 million small businesses are at risk of shuttering permanently. Many of those who are unemployed won’t have jobs to return to and will be competing for the few new jobs that are created. The unemployment rate for lower-income Americans won’t remain at today’s 40% levels but could easily settle at 20%+ to an extended period of time.
In addition to the general optimism, many of the current unemployed workers are making more today than they were working full-time. With the additional $600/week in unemployment benefits, 68% of individuals are earning more while unemployed. This is enabling them to keep up with their bills including paying rent. However, these benefits are short-term and scheduled to run out on July 25th.
Having a job is about far more than a paycheck. A job provides economic stability, a purpose, and signals you’re valued by society. It’s also a key factor in happiness levels. If you’re unemployed for a sustained period, you begin to lose self-respect.
So what happens when the additional benefits run out, the reality of long-term high unemployment sets in, and we accept that we’re in a full-blown recession?
While I’m hopeful that by the end of the summer the virus is more under control, the economy begins to rebound, and we’re moving in the right direction, but our problems won’t be solved. I expect to see an uptick in delinquency in September through December, before a leveling out early next year.
On the Atlas side, we continue to be hands-on in the asset management of our properties. We’re working with delinquent residents by offering payment plans and those that fall too far behind with little prospect of catching up are offered the opportunity to turn over the unit and walk away with no ramifications.
We’re hoping for the best but preparing for the worst.