NOI hit in last recession?

Question

Are there any old timers on here who owned apartment buildings through the last cycle? I'm curious what happened to your NOI. Did it take a hit, and by how much? Was is from increased vacancy, increased concessions, decreased rent, or all of the above. Also, what class was your building and neighborhood?

Thanks,

Teague

Thanks,

Teague

Serge S. · Answer

To say that NOI was not effected in the last recession is like saying there will not be another recession. In the SFR space rents were actually very stable. In Arizona, multifamily bad debt was very high. There was no rent growth and there were negative year over year rents. Vacancy was over 10% in most secondary markets, those markets generally were left for dead. People were purchasing on multifamily on bridge debt pre crash and found themselves unable to refinance. Capex improvements capitalized no value because population growth ground to a halt and there were no new jobs to absorb. This is a very relevant question today as people are once again saying rents will never decrease, population will always grow and the market will never adjust and overbuild. Don't believe the hype.

Teague Anderson · Answer

I went to the Best Ever Conference last month, and the keynote speaker was John Chang, Vice President of research at Marcus & Millichap.  He gave a presentation on the state of the market and economy, and one of the slides he threw up was of vacancy rate during the last recession across A, B, and C class apartments. According to his chart, A Class was affected very little, B Class took about a 5% hit, and C class took about a 10% hit.

I think this caught the attention of a lot of people in the audience.  Someone even asked during the Q&A if John could elaborate on that.  He explained that A Class tenants generally have more secure jobs and savings, and C Class tenants generally don't have those things.  Makes sense.  But it always seemed intuitive to me that in a recession, people would get squeezed out of the A Class apartments into more affordable units, as well as people getting squeezed out of owning into renting.

I asked John more about this during a break and if he had any data on not just vacancy, but NOI, because I wonder if A class just hides their losses with concessions instead of lowering rent.

Anyway, what you say @John Warren and @Christopher Lombardi seems totally rational and what I would expect.  Maybe those numbers on his slide were affected by some of the hardest hit cities.  But then again, even there people gotta live somewhere...

Jack Martin · Answer

@Teague Anderson the variable that is often overlooked that impacts NOI during a recession is tenant turnover.  Even with a relatively low vacancy, if your tenant turnover is high, your NOI will take a big hit.  Turnover is the most costly event related to stabilized asset performance because not only are you not collecting rent, you typically need to spend money to prepare and market the unit for the next tenant.  As @John Warren mentioned, a recession would suggest a potential for lower vacancy in apartments and rental homes (due to the high demand) but the metrics that really matter are how long the tenants stay, and what it cost to get them.

During good economic times, there is usually low vacancy, strong rent growth, and little to no concessions.  During tough economic times, tenants seeking the most affordable option have a lot of choices and are often "stolen away" by a competing properties offering lower rent or an attractive concession. There is no real barrier to them leaving, except the deposit they might forfeit.  During 2008-20011 there were "zero dollar" move in deals, "first 2 months free", "we will pay for you to move" and many attractive concessions that would cause a tenant to move in spite of the deposit.

That's one of the reasons mobile home parks perform so well during a recession.  In a MHP, the tenants have homeownership, so they cannot easily be "stolen away" by a competitor.  Imagine a rent roll of tenants that have been there for 10-15 years.

John Warren · Answer

@Serge S. has some especially good points about secondary markets. I own a 20 unit in a secondary market, and the difference between a small market and Chicago cannot be overstated. In a primary market you have better tenants, better jobs for tenants, better management companies, better and more contractors... it is really just a lot easier to own in a primary market.

I would imagine that sub markets all reacted differently during the last recession. Most of the investors I know were in the Chicago western suburbs in B and C class areas. The experienced owners all tell the same story. Things got better for them during the crash, not worse. Of course, they were not over leveraged and most of them are very conservative (some have totally paid off properties). If you are over leveraged, I am sure the conversation is different.

Christopher Lombardi · Answer

@Teague Anderson in my area, the property values decreased but rental rates increased because people were moving into rentals as they lost their homes and the demand for rentals skyrocketed.

John Warren · Answer

@Teague Anderson I did not own property through the last recession, but I am fortunate enough to be a member of a local land lord group where the average member is in there 60's or 70's. I have been asking a lot of them questions about this very thing. Most of these experienced land lords actually did better during the recession than they did before it. Many of them told me stories of horrible tenants with poor credit buying homes pre-crash. These tenants would sign a lease, but then realize they could buy a home.... crazy.

Most of these land lords owned properties in Cicero, Berwyn, Forest Park or Oak Park, IL. These areas range from C class all the way up to A class in some cases (Oak Park). The C class property owners in particular did very well during the recession as rental rates sky rocketed and vacancy almost completely disappeared. Apparently vacancy had been in the 10-12% range pre-crash, but during the crash there were many more qualified tenants who could no longer buy a home.

NOI hit in last recession?

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