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Should Rental Owners Be Worried About Rent Drops and Delinquencies?

market research Mar 24, 2020

“Owners and operators may face short-term rent collection issues if there is a tightening in the employment market, and value-add projects will likely slow, however, most real estate investors are poised to sustain their operations and may see an investment opportunity as the market shocks continue...” - Yardi Matrix

Owning Multifamily During the Outbreak

According to Forbes, as of December 2019, we've experienced 126 months of continuous growth as a nation. A lot of that growth can be attributed to how we've been able to recover from the prior recession... but this is March 2020 and we're finding ourselves in an interesting situation.

Business and leisure have just about drawn to a halt. Restaurant, trade, and hotel/travel industries are taking a dive. The effects of social distancing have effectively started what might be an inevitable "technical recession".

Almost all of our readers currently own real estate investments. If you're in that bucket but are actively seeking out a rental property you've probably asked one of these questions this month: With the outbreak in full-swing, is safe to buy multifamily? Are the investments I already own going to take a hit in the coming months? What should I expect in the next few months as far as delinquencies or rental changes?

Data So Far...

According to the Yardi Matrix, data from last month hasn't yet reflected the impact of the coronavirus on real estate investing: "February employment growth was very strong, jobless claims did not increase, and rent growth continued in a steady increase."

So what can we expect?

It's best to expect continued employment cuts and a slowdown in trade and for at least a few months. But the truth is... none of us can predict the true extent of the COVID-19 outbreak and its eventual impact on unemployment. Yardi seems to be fairly confident despite the unknown, "As COVID-19 continues to spread it appears as if the rental housing industry will have the strength to weather the storm."

Forbes reported this yesterday:

"It’s mostly welcome news for income property investors. Employment and income growth, and expansion in regional markets [over the last year] driven by tech and manufacturing development, bolster the multifamily market.

"Proactive multifamily investors are responding to the dynamic economic environment by positioning their properties through improvements, amenities, and marketing to command the highest lease rates and choice tenants. As a contingency, accredited investors are allocating increasing shares of capital into professionally managed assets that reduce risk, bypass increasing competition for acquisitions and require no direct management." - Forbes (March 23, 2020)

Vacancy, Delinquency, and Rental Growth

Last week, President Trump announced that his administration will be "suspending all foreclosures and evictions until the end of April" to help those affected by the virus. Gov. Gavin Newsom in California ordered that local jurisdictions should specify that "if a tenant cannot pay the rent because of COVID-19, that tenant’s rental payment is deferred for a reasonable period but not waived.” It's important to be sensitive to renters during this time while also seeking a local policy that supports both ends of the investment.

These are great things to say. But what President Trump or Governor Newsom says about mortgages doesn't necessarily translate into smooth implementation (or any implementation) by your mortgage servicer. Many of us remember the clunky rollout of loan modifications during the great recession. The right hand doesn't always know what the left hand is doing when the government steps in to grant relief.

What To Expect...

The Yardi Matrix reported they expect the impact of COVID-19 to last three to six months before seeing a steady recovery. As long as interest rates stay at an all-time low and financial institutions are capitalized, Yardi says that a slowdown period will offer investment opportunities to those owners who have enough extra cash.

“Owners and operators may face short-term rent collection issues if there is a tightening in the employment market, and value-add projects will likely slow, however, most real estate investors are poised to sustain their operations and may see an investment opportunity as the market shocks continue.”

If you own multifamily properties that have tenants in the low-to-moderate income range, the prudent path forward is to plan on increased delinquency for a few months. In addition, many local governments may not let you evict tenants (who can't pay due to direct impact from Covid-19) even if you wanted to.

Conclusion For Now

Forbes: "The stabilizing economy may offer opportunities for investment growth; however, poorly managed income properties flounder in any economic climate. Consequently, multifamily investors should take precautions to ensure lean operations and tenant appeal to stay competitive and profitable."

This is one of the reasons why we've built an investment model that focuses on new construction multifamily that is professionally managed and amenity supported. It's key factors like these that help ensure long-term market demand during an economic downturn.

If you looking for a long-term play, then taking advantage of the market now and putting it to work in a vehicle that is more recession-resistant is probably your best course of action. But nothing is recession-proof, so weigh out your options, keep plenty of reserves, and find a market that has a strong and stable economy.

"To prevent vacancy and command top-of-market rents, investors should diversify and recession-proof their portfolios by selecting markets and properties that exhibit the optimal mix of economic drivers to support high occupancy — despite any impending interest rate shifts or trade conflicts with foreign economies."

Questions?

** If you have questions about any of your current FIG fourplex investment properties and what to expect over the coming months, please direct all inquiries to your FIG agent or send us a message by filling out the form below. We'll also continue to post updates here and on social as things play out.

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