In the late stages of the recently concluded US economic expansion, cautious investors prepared for the possibility of a downturn by pouring money into an unsexy sector of the real estate industry: rental apartments.
In the real estate world, multifamily housing, as the sector is known, is renowned for its safety because, the thinking goes, people will always need a place to live. While they may cut back on luxuries, preserving a roof over their head is a priority.
That thesis is now being put to the test as unemployment surges during coronavirus lockdowns. Thousands of Americans are expected to take to the streets on Friday in support of a rent strike prompted by the pandemic, and landlords like Norman Radow of Atlanta, Georgia, can only guess about how much rent they can expect from their properties.
“Twenty-eight per cent of the families in this state are living hand to mouth and in fear,” said Mr Radow, citing recent jobless claims in Georgia. The residents of his mostly “class-B” properties — spread out across his home state and seven others — tend to earn about $45,000 per year, he noted. “They don’t have a month saved up to cover.”
In April, landlords fared better than many expected. As of April 26, 91.5 per cent of households had paid rent, according to the National Multifamily Housing Council, a developers group. That was down 4.1 percentage points from the same period a year earlier.
But most expect May to be worse. The economy was only just shutting down in many places by the time April rent was due. In the interim, millions of workers have been laid off. Compounding problems, many states have been slow to process the enormous volume of unemployment claims.
“There are still a lot of families living pay cheque to pay cheque and they’re evaluating their situation week to week,” said Priscilla Almodovar, the chief executive of Enterprise Community Partners, a non-profit that focuses on affordable housing.
Ms Almodovar is particularly worried about what will happen in August — by which time the $600-per-week unemployment insurance supplement included in the federal stimulus bill will expire. “Unless new relief comes out of Washington, what happens on August 1?” she asked.
In the meantime, some landlords believe that politicians are worsening their plight by giving encouragement to tenants who do not wish to pay. Temporary bans on evictions have sprung up across the country. Some politicians are calling for more dramatic relief.
Alexandria Ocasio-Cortez, whose congressional district in the New York City boroughs of the Bronx and Queens has been devastated by coronavirus, is supporting proposed legislation that would cancel rent for the duration of the pandemic.
“People aren’t striking because they don’t feel like paying rent. They’re striking because they can’t pay rent,” Ms Ocasio-Cortez said.
Such a solution would hurt landlords, who still have to pay property taxes and other overheads. Depending on how it is implemented, it could also inflict wider damage on the economy, according to David Stern, president of Townhouse Partners, a due diligence firm that services commercial real estate clients. “It trickles up,” Mr Stern said. “If the renter cannot pay the lease, then the owner can’t pay the lender, and the lender — whoever that is — can’t repay its investors.”
Ms Almodovar, a former JPMorgan banker, agreed. She supports a plan popular with many developers: to provide some future assistance to renters in the form of a credit that would go directly to cover rent. “They’re both in it together,” she said of renters and owners. “It’s not constructive to pit one against the other.”
Before the pandemic, the multifamily sector was thriving. In 2019, it attracted $184bn in investment, according to Real Capital Analytics — more than any other real estate category and the highest level since the firm began tracking the sector in 2000. In January and February, investment was up 13.2 per cent over the same period last year while rent growth was far outpacing inflation in markets such as Phoenix and Nashville.
Then came the pandemic.
Mr Radow has seen distress before. His firm, Radco, was hired by Lehman Brothers three days after its collapse to begin overseeing the liquidation of its vast real estate portfolio. He remembers being brought a trolley cart of files, and then instructed: “They’re all yours. Everyone was fired. Figure them out.”
Mr Radow remains convinced that multifamily will again prove its resilience, even if delinquencies rise and rents decline. For April, his revenues were about 6.5 per cent lower than March. In an email to staff, he urged them to have empathy and “understand the pain and fear” of their tenants.
By contrast, he could not see any market for hotel rooms — or predict when might one return. He also believes demand for office and retail space will decline well after the crisis has passed. “I think it’s the safest place to be right now,” he said of multifamily housing.
That is not to say everyone who put money into rental apartments will be safe. Even before the pandemic, veteran multifamily investors were raising eyebrows at the prices newcomers were paying, and the debt they were taking on to do so.
Operators are now facing higher costs for services such as cleaning, while social distancing rules are forcing them to use virtual tours to show apartments.
The extent of the damage will also depend on what people own — and where. There are properties in Orlando and Las Vegas where residents are largely employed by local resorts that are now shut down. The delinquency rates there could be much higher than elsewhere, developers worry.
There is also Texas, which is grappling not only with the pandemic but the collapse of the energy sector. In December, Mr Radow said he unloaded a portfolio that included 10 properties in Texas and Oklahoma.
It was part of a broader shift in which he trimmed his portfolio from a recent high of 29,000 units built up during this cycle to about 12,000. “We expected a bad recession,” he explained. But not this.