Yardi Matrix Research Director Paul Fiorilla sheds light on the policies, economic issues and market trends that are challenging the industry.
The apartment industry is facing the national spotlight related to a potential wave of evictions just as multifamily fundamentals are hitting unprecedented heights.
Although this juxtaposition seems contradictory, it illustrates both the bifurcated COVID-era economy and the apartment market. Larger, professionally managed properties that cater to a more upscale tenant base are performing better than assets and tenants in smaller properties. “It’s a tale of two different worlds,” said a researcher at an industry trade group.
What’s more, the bifurcation exposes vulnerabilities in the rental housing market—such as the need for better aid mechanisms, the need to relax limitations on supply, and the need for better data in the middle market segment—that must be fixed to solve the nation’s longstanding housing woes.
EVICTION BAN IMPACT
The Centers for Disease Control and Prevention (CDC) last week announced the controversial extension of its eviction moratorium through Oct. 31 in areas hard-hit by COVID-19. The government was responding to pressure from advocates for the poor, who warned that unless the eviction ban was extended, millions of residents could be evicted and possibly thrown into homelessness.
Studies by Moody’s Analytics and the National Equity Atlas (NEA) put the number of renter households that are behind on rent payments at 6.4 million. Moody’s estimates that at midyear, tenant households owe an average $4,270 in back rent totaling $27.5 billion, while the NEA estimates that the average household in arrears owes $3,300 totaling $21.3 billion.
The announcement of the latest ban was met with dismay from a coalition of multifamily industry trade groups. “The recent CDC order will leave rental housing providers in legal limbo while many renters continue to accrue more and more back rent and face a mounting debt cliff,” the coalition said in a statement. “Further, a continued moratorium fails to deliver the needed solutions to address the underlying financial distress faced by renters and puts the overall stability of the rental housing sector … in peril.”
A federal judge already has ruled that the CDC lacks the authority to order such a ban, so the newest moratorium is likely to be overturned in the courts. The process, however, could take enough time to effectively delay new eviction filings in most jurisdictions for a month or two. From a practical standpoint, several large states such as California, New York, New Jersey and Massachusetts have their own bans in place, so the impact of the CDC moratorium is limited.
MULTIFAMILY DEMAND, RENTS SURGE
One argument for ending the eviction moratorium bans is that they have contributed to the eye-popping rise in apartment rents in 2021. Year-to-date through July, multifamily asking rents jumped 8.3 percent, the largest increase in decades, according to Yardi Matrix data. Year-over-year, asking rents are up more than 10 percent in nearly half of the top 30 metros, while rents are rebounding rapidly in Gateway markets that saw steep drops during the pandemic.
Rent growth is being driven by intense demand. In the 12 months through June, 423,000 multifamily units have been absorbed nationally, per Matrix, the highest 12-month total in the last two decades. That has pushed U.S. occupancy rates of stabilized properties to 95.3 in June, up by 60 basis points year-over-year and close to record-high levels, per Matrix.
There are a host of reasons for the surge in multifamily performance. There is pent-up demand in household formation that was delayed by COVID-19 in 2020. Some renters are staying put in apartments due to the surge in single-family home prices as both institutional and individual investors bid up prices for rental houses. The recovering economy, government stimulus, and growth in personal savings during the pandemic have helped to create strong household balance sheets for people who remained employed.
Another factor is the long-term shortage of housing stock being built. Housing starts plummeted in the wake of the 2008 financial crisis and have yet to fully recover. The eviction moratorium is one other factor that has kept people in place, boosting overall occupancy and stimulating rent growth.
All this raises the question: How are multifamily market fundamentals so robust if upward of 15 percent of renters are behind on payments? The answer seems tied to the bifurcated nature of the economy. Although the data is murky, renters in arrears seem to be concentrated in smaller properties that are not captured by the data derived from professionally managed apartment properties that typically cost more to rent than properties owned by small investors, and whose tenant base is wealthier than the average renter.
Since the start of the pandemic, the National Multifamily Housing Council (NMHC) has published a rent tracker that captures payments of 11.7 million professionally managed units. Rent payments in this survey have consistently been only 1 or 2 percentage points behind pre-pandemic levels. In 2021, overall payments have ranged between 93.2 percent in January and 95.9 percent in March.
SMALLER PROPERTIES BEAR THE BRUNT
A small reduction in multifamily rent payments doesn’t portend an eviction crisis. The news about smaller properties isn’t as good, however. A survey by the Washington, D.C.-based Urban Institute and Avail.co found that since March 2020, 87 to 90 percent of residents in properties with less than five units have paid rent each month, which is a higher rate of non-payment than for professionally managed units.
Smaller rental properties are more likely to be owned by mom-and-pop investors and have lower rents than institutionally owned apartments. The Urban Institute says that there are 6.2 million rental units in two-to-four-unit buildings with an average rent of $940 a month, well below the $1,510 average for institutional properties recorded by Matrix. Individual investors own 77 percent of small-building units, a much higher percentage than larger properties, according to the Urban Institute.
A greater proportion of residents and owners of small properties are minorities and have lower median incomes than residents and owners of institutionally owned properties. The NEA’s study of residents in arrears found that 81 percent had household income of less than $50,000, while 64 percent were people of color. Slightly more than half (51 percent) of those in arrears were unemployed and 48 percent had lost income in the last four weeks.
“COVID landed a lot harder on lower-income people who are often in smaller properties, and who are often renting from friends and family,” said Michael Manville, an associate professor of urban planning at the UCLA Luskin School of Public Affairs, which published a paper last month about the pandemic and renter distress in Southern California. “People in these buildings are more likely to have lost income, and then may be more likely to react by missing a payment.”
The economic profile fits with the “K-shaped” economic recovery, as job categories at the high end of the ladder have held up far better than those at the lower end of the pay scale. Example: as of July, the financial activities sector was only 50,000 jobs behind its pre-pandemic peak of 8.9 million, while leisure and hospitality was 1.7 million jobs under its 16.9 million high point, according to the Bureau of Labor Statistics.
The difference in ownership size is important in other ways. Studies show that professional apartment managers are generally more aware of—and have the resources and expertise to apply for—the $46 billion of federal renter assistance passed by Congress in 2020 and 2021. A recent survey of NMHC members found that all respondents had offered some sort of renter assistance to residents that are struggling, and many are proactively notifying their residents of the available federal assistance. But only 60 percent of the mom-and-pop owners surveyed by Urban Institute and Avail in June were aware of the aid, and only 68 percent of those aware and eligible applied for aid.
Lack of awareness about the program, and delays at the state level where the funds are being dispersed, resulted in only $1.8 billion being dispersed nationally through midyear, according to the U.S. Treasury Department. About one quarter of the distributions are in Texas, and very few states have distributed anywhere near the amount they were allocated. New York state, for example, has not allocated any funds. Local programs have provided another $1.2 billion, bringing the national total to $3 billion.
WANTED: BETTER POLICIES, DATA
That strong multifamily performance exists side by side with renter distress illustrates not only the bifurcated state of the market, but points to areas of badly needed improvement for the U.S. housing market. One issue is that better aid mechanisms for rent-challenged households are needed. The large percentage of households that spend more than 30 percent of their income on housing is a problem that has been ignored for some time, and it will only worsen as the cost increases for buying and renting housing far exceed the growth of inflation and GDP.
The Biden administration has proposed ambitious increases in housing assistance. The Biden agenda includes items such as expanding the Low-Income Housing Tax Credit and creating a renter’s tax credit that would help reduce the housing share of household expenses to 30% of income. However, it is not clear whether proposals will get through a divided Congress. Housing aid was removed from the bipartisan infrastructure package because Republicans contend that it doesn’t meet the traditional definition of infrastructure.
More efficient aid mechanisms would be less critical if the country could create enough housing that is affordable for the middle class. NIMBY-ism and local opposition have long stymied the production of housing units, while red tape and rising costs of materials and land have made it nearly impossible to build properties affordable for working-class families. Here again, the Biden administration has plans to provide municipalities a carrot to encourage housing development. One proposal would make grants to municipalities through programs such as Community Development Block Grants and Surface Transportation Block Grants contingent on the adoption of local policies that encourage development of affordable housing.
Lastly, the difficulty in pinpointing problems faced by mom-and-pop owners and residents of small properties demonstrates the need for better data that captures property-level detail in that segment. Unlike the rich detail available in the institutional market, much of the data on small communities is based on surveys. More granular information on small properties would enable stakeholders to better identify issues and devise ways to solve them.