How do different property classes perform in a downturn?

[Tom Lafferty]

Looking for input from those who have actually owned multifamily property during a downturn in the market.   I've heard a lot of theories about how different classes are affected by changes in the market.  We typically buy C class stuff, and I constantly hear discussions about how C class won't be affected by all the new construction, because "they're not building anymore of those," or "where do you think everyone has to move when jobs go away," and any number of other conversations.  The flip side is that as A class overbuilds, they drop their rents, and  B tenants are able to move up a class, and the trickle down effect hurts everyone.  

I'm in the DFW area, and even though we didn't get hurt as badly as other areas, when I look at the data, there was definitely a drop in rent growth and occupancy during 08 and 09.  It wasn't terrible, but it was there.  As a result, I always stress test my numbers for a drop in performance.  I'm looking at a deal that is in an A or maybe even A+ area, and wonder if it needs to be stressed to a greater degree than the usual C class deals, or stressed less because its such a good location.  To be more specific, this is NOT a new construction, super nice, $2000/month property like we have popping up on EVERY corner in DFW.  It is an old, but desirable property in a great area.  Its rents are significantly below the newer stuff, so I think we have a cushion there.  I do know that the property will always have a lot of people wanting to lease, I just don't know how hard to stress the rents in this situation.  

I know there's no concrete answer to this question, but hoping someone with a lot of experience (hello @Brian Burke!) can provide some direct experience.  

[Brian Burke]

@Tom Lafferty don't believe the hype that class C is where everybody moves to when jobs go away.  If they have no job, would you want them as a tenant?  Would they pay the rent if you did?  When there is an economic downturn class C gets hit the hardest.  It might be the last to get hit, but the wound runs deep. 

Folks who lose their job don't move to class C, they move in with friends or family.  Looking at the data you correctly found a drop in rent growth (for all practical purposes it went to zero) and a drop in occupancy in 08 and 09.  But that doesn't tell the whole story.  What you don't see in the data (because it isn't reported) is the delinquency rate.  The joke was that class C had half of their units vacant and the other half weren't paying.  That is an exaggeration but it wasn't uncommon to see 20% to 30% vacancy and 10% delinquency (almost all of which was unrecoverable).  Some properties had lower vacancy because they severely cut their screening standards to put heads in beds, but their units were full of concession surfers who would take the one month free deal, never pay, wait to be evicted, then repeat at the next property. 

Meanwhile, A properties get hit with negative rent growth and concessions but don't suffer as bad in terms of turnover, delinquency and evictions because they can attract the good tenants that still have jobs just by lowering the rent and undercutting inferior properties.  That's why I'm sticking to a notch up in quality when making my acquisitions at this point in the cycle.  And, as you astutely mentioned, underwriting to stress in the market.