Rents Drop, Prompting Concern

Industry insight from Yardi Matrix

By Paul Bergeron on Jun 18, 2020 in Matrix, News

When you think about a 0.3 percent drop in anything it hardly seems like a big deal. It’s just 3 pennies on every 10 dollars. If you are an apartment operator and that reflects the national average on rents for May compared to April, some would figure it’s something not too difficult to make up.

But what if it isn’t? The three-tenths of a percent is the drop for one month, and 12x that comes to 3.6 percent annually. Quickly, that could become serious.

During what would typically be the middle of prime leasing season, rents declined nationally by 0.3% on a month-over-month basis, reports Jeff Adler, vice president of Yardi Matrix. He describes that drop in rents as startling.

“Is it a harbinger of things to come? A warning sign?” Adler says. “When rents being offered to new residents drop like that month-over-month, year-over-year you have to ask yourself.”

Adler says current national multifamily occupancy rates are mostly steady (a good thing). And there’s no deterioration in demand as measured by apartment search activity, which is also positive.

“But this is peak leasing season,” he adds. “Falling like this would be at a rather significant clip. If we see it again next month, then demand will not have stabilized. And data show this is happening to high-end apartment communities.”

The steepest declines in rents on a MoM basis were seen in major gateway markets that were among the first to impose strict lockdowns. Smaller markets are not immune and have seen substantial MoM rent declines as well.

For this “general rolldown” in rents, Yardi Matrix has observed year-over-year price decreases of -0.6 percent to -1 percent for houses for rent in Los Angeles, San Jose, Houston, Orlando, Denver, San Francisco and Chicago.

Unprecedented Swiftness

Many long-standing observers and employees of the multifamily industry can point to real estate’s cycles, and to the Great Depression, back around 2008-09, when rent declines were similar.

“But the swiftness of what we’re seeing now is unprecedented,” Adler says. “Back then, job formations were slowing and you could almost read between the lines to know something bad was coming up. There were signals. This time, it’s sudden. This time it’s being caused by a health issue. We are counting on a vaccine or treatment to COVID-19 to turn the tide.”

Job creation, of course, is helpful. Job losses, however, equate to income losses and ability to pay the rent, and inability for owners to stabilize (if not raise) rents.

“For the sake of the industry, let’s hope that six months down the road things are different,” Adler says. “Wouldn’t it be great to go back to how it was in February, or even in 2019?”

Some can speculate that the “busy season” for leasing could move to fall this year.

Look at These Numbers

Yardi Matrix also reports that national average rents decreased $5 to $1,460. Kansas City (0.4 percent), San Antonio and Baltimore (both 0.1 percent) were the only markets to show increases from April to May; 23 markets remain negative on a month-over-month basis. the last two months overall, rents have declined by $13.

“If rents continue this rapid downward trend, we could be looking at alarming numbers by the end of the summer,” Adler says.

The markets with the most severe MoM declines include Houston and San Jose (both -0.9 percent) and Nashville, Orange County and Seattle (all -0.8 percent). Houston tends to be among the most volatile markets in a normal month, and given the rapid decline in oil prices the road to recovery in Houston could be extended. San Jose, Orange County and Seattle were among the first markets to impose stringent lockdowns. Seattle only entered Phase 1 of reopening on June 5.

Social Unrest Could Affect Urban Rents

Apartment operators also must consider the social unrest that is going on in many urban centers.

“What’s going on right now — with the role police will play in society – these urban areas are up for grabs,” Adler says. Respectful policing in our communities will help them to thrive. History shows that if there is a shift away from urban to suburban it will happen gradually.”

The social demonstrations also bring to mind the 2019 push for opportunity zones. This is a designation and investment scheme created by the Tax Cuts and Jobs Act of 2017, allowing for certain investments in lower income areas to have tax advantages. The purpose of this program is to put capital to work that would otherwise be locked up due to the asset holder’s unwillingness to trigger a capital gains tax. States may designate up to 25 percent of low-income census tracts as Opportunity Zones.

“Everything I’ve heard is that all of these projects are moving forward,” Adler says. “These decisions are not being overshadowed by events. These projects are being penciled out. Given the capital cost advantages that are out there now, you can see why.

“If we are heading into the depth of a recession, then this sometimes is the best time to start them. They won’t be completed for three to five years and a lot could change by then. It’s the projects that are being completed now that you might have to worry about.”

With so much to observe and monitor closely, it’s vital to keep up with the latest industry data. Find all the latest market information from Yardi Matrix.