Rough Waters or Smooth Sailing for Multifamily Fundamentals?
On May 5, 2021, the D.C. Federal District Court overturned the Centers for Disease Control’s (CDC) nationwide eviction moratorium that was established by the Trump Administration in September 2020, and extended by the Biden Administration through June 30, 2021.
Despite the decision to overturn the eviction moratorium, the Federal Court has allowed the CDC to keep the moratorium in place as the decision goes through the appeal process. With its imminent removal, we must ask: “What impact will the lifting of the eviction moratorium have on multifamily fundamentals in real estate?”
Moody’s 1Q2021 Forecast indicated that physical vacancies were relatively flat from YE 2020 through March 2021 at 5.3%. In conjunction with the flat vacancy rates, effective rents have seen a slight decline of 0.2% over the first quarter of 2021.
When considering the trends observed in the NMHC’s rent payment tracker, which tracks rental property payments of approximately 11.6 million rental units each month, rental payments are generally on the decline, ranging from a high of 95.9% of rent collected in June of 2020 to a low of 93.2% in January 2021, averaging 94.5% over the same period.
We believe that the spike in rental delinquencies is tied directly to the nation’s unemployment rate, especially considering those who are in the service industry, which was projected at 10.9% as of April 2021, considerably higher than the 2019 average of 5.3% and national unemployment rate of 5.7% for the same period.
The most recent data published as of April 2021 suggests 95.0% of renters have paid on time, an improvement over January 2021, but still lower than the 2019 average of 96.2%.
To put this into perspective, 1.2% of the difference in the pre-covid and current delinquency rate of 11.6MM units surveyed equates to approximately 172,000 units, which is in line with the entire combined apartment stock of 5 states (DE, MT, VT, AK, and WY) at 172,538 units. We believe that the recent improvement in rent payment correlates to the most recent stimulus injection from March 2021, with tenants likely utilizing stimulus payments to satisfy overdue rents.
In addition, the nation is seeing a continued improvement in the hospitality sector’s unemployment rate, which has improved each month from its high of 39.3% in April of 2020 to its current 10.9%.
Given this, the combination of the eviction moratorium going away and a lower-than-normal rent-paying tenant base, poses a challenge for owners, landlords and tenants.
When considering current physical occupancy levels (94.7%) of which 95% do not have delinquent rent, there is a potential for an additional 4.7% of economic vacancy that is currently not being realized in property-level economics.
From an Underwriting and Asset Management perspective, the potential impact on loan fundamentals will be driven by property-level financial reporting, which may include atypical chunks of written-off bad debt and would put pressure on debt service coverages.
To summarize, we believe that economic and physical occupancy components will see a slight deterioration when the eviction moratorium is officially lifted, before rebounding and strengthening throughout the rest of the year—we believe that this dip will be relatively short-lived as any uncollectable rent is written off.
This quick rebound is expected given that more than 40% of Americans have been vaccinated and will allow local economies to continue opening up, as well as a continued improvement on the national unemployment rate (currently 6.1% compared to a mid-COVID-19 peak of 14.8% in April 2020).
This should also translate to an improvement in long-term multifamily real estate fundamentals, as rental delinquency rates are already starting to improve despite the eviction moratorium currently in place. This lines up with industry reporting, which indicates that market participants project apartment fundamentals will continue to strengthen throughout the course of 2021. Armada is working diligently with our Lender clients when faced with all situations surrounding the eviction moratorium to ensure loan performance, while also considering lending threshold criteria to navigate through these challenging times. We are here to help you and your team navigate these situations. If you have any questions about the above, please reach out to Michael Fissette at [email protected].