A Theory On Why Multifamiliy Won't be Affected By Covid

[William Coet]

 Correct me if there are things I'm missing, but here is why I think this situation is different for multifamily than any other recession.

This is not like any other economic crisis because the gov immediately decided to pay everyone to get through. People are receiving money directly into their accounts through the stimulus checks and an additional $600/week on top of their base unemployment payouts. Many will be earning more than they were while working. Gov. is saying these enhanced payments can continue for 39 weeks. They will likely be willing to continue longer if needed.

Nothing like this happened in any other recession or 9/11. The Average person was on their own during the 2009 crash. Now they are supported by government payouts almost immediately (some may have to wait for payments, but they are coming)

[Daniel Sperling]

@William Coet this is such an interesting problem to think through. I was able to find some data from the National Multifamily Housing Council's Rent Payment Tracker. Across the US, 84% of tenants paid their rent by April 12th. That compares to 90% the year prior. It also seems rent payment defaults will increase for May rent since there are delays disbursing unemployment benefits and payroll protection loans. Here's the source: https://www.nmhc.org/research-...

The US is a consumption-driven economy. Consumer spending comprises ~70% of GDP. According to Wells Fargo, consumer spending is down 35% at this point compared to same time last year. Saw similar numbers from Bank of America a couple weeks ago. I don't know about you, but this sounds right to me based on our family's own spending of late. If consumers don't spend, businesses can't pay employees, tenants can't afford rent, rent rates either need to be reduced or landlords need to accept lower rent revenue vis-à-vis higher non-payment rates. Other things could happen like employees forced to take pay cuts to keep their jobs, which will have a similar effect. Or we see a marked shift from homeownership to renting as people lose their homes which might support rent rates... Lots of different scenarios to consider.

Looking at public markets, Equity Residential (EQR) is down 25%, AvalonBay (AVB) is down 29% from February 21 highs. Income producing properties are valued based on cap rate, so from this perspective we should expect valuations to decline in the near term. This said, the Fed is pumping money into the economy which as we saw in the Great Recession should cause asset values to increase both as means of chasing yield with interest rates near zero and as a hedge against inflation (holding cash is not good in that environment).

I don't see consumer spending snapping back to pre-COVID levels. This will take time as the consumer needs confidence that their health and job is safe before spending on non-necessities / things that bring them out of their homes. I wonder if this economic shock might condition business and consumer spending to be more frugal over a longer time horizon.

That's just my 2 cents, not an expert but a long-term value investor. Will be interesting to see what happens! Stay safe and hopefully members of the BP community will weather this crisis and find some bargains along the way.

[Nick B.]

MF is already affected as April collections are lower than they should've been by this time of the month. May is expected to be even lower.

While it's true that some people are getting higher unemployment payments than they were making on their jobs, there is a high chance that the money will be sent on things other than rent first. Also, with eviction moratorium in place many tenants will decide to live rent-free for the next 4-6 months or maybe even longer.

[Hadar Orkibi]

@William Coet Lower collections -> Lower Income -> Lower NOI -> Lower Values.

Higher Cap rates and better investment opportunities to those who have access to Cash.

But challenges to those who need to refinance.

[Daniel Sperling]

@William Coet this is such an interesting problem to think through. I was able to find some data from the National Multifamily Housing Council's Rent Payment Tracker. Across the US, 84% of tenants paid their rent by April 12th. That compares to 90% the year prior. It also seems rent payment defaults will increase for May rent since there are delays disbursing unemployment benefits and payroll protection loans. Here's the source: https://www.nmhc.org/research-...

The US is a consumption-driven economy. Consumer spending comprises ~70% of GDP. According to Wells Fargo, consumer spending is down 35% at this point compared to same time last year. Saw similar numbers from Bank of America a couple weeks ago. I don't know about you, but this sounds right to me based on our family's own spending of late. If consumers don't spend, businesses can't pay employees, tenants can't afford rent, rent rates either need to be reduced or landlords need to accept lower rent revenue vis-à-vis higher non-payment rates. Other things could happen like employees forced to take pay cuts to keep their jobs, which will have a similar effect. Or we see a marked shift from homeownership to renting as people lose their homes which might support rent rates... Lots of different scenarios to consider.

Looking at public markets, Equity Residential (EQR) is down 25%, AvalonBay (AVB) is down 29% from February 21 highs. Income producing properties are valued based on cap rate, so from this perspective we should expect valuations to decline in the near term. This said, the Fed is pumping money into the economy which as we saw in the Great Recession should cause asset values to increase both as means of chasing yield with interest rates near zero and as a hedge against inflation (holding cash is not good in that environment).

I don't see consumer spending snapping back to pre-COVID levels. This will take time as the consumer needs confidence that their health and job is safe before spending on non-necessities / things that bring them out of their homes. I wonder if this economic shock might condition business and consumer spending to be more frugal over a longer time horizon.

That's just my 2 cents, not an expert but a long-term value investor. Will be interesting to see what happens! Stay safe and hopefully members of the BP community will weather this crisis and find some bargains along the way.

[Matthew Irish-Jones]

There has already been an impact. Houses are sitting on the market, and collections are behind on rentals.

[William Coet]

Originally posted by @Matthew Irish-Jones:

There has already been an impact. Houses are sitting on the market, and collections are behind on rentals.

My thought is once checks and enhanced unemployment payments arrive, the rent will be caught up.

[Greg Dickerson]

Originally posted by @William Coet:

 Correct me if there are things I'm missing, but here is why I think this situation is different for multifamily than any other recession.

This is not like any other economic crisis because the gov immediately decided to pay everyone to get through. People are receiving money directly into their accounts through the stimulus checks and an additional $600/week on top of their base unemployment payouts. Many will be earning more than they were while working. Gov. is saying these enhanced payments can continue for 39 weeks. They will likely be willing to continue longer if needed.

Nothing like this happened in any other recession or 9/11. The Average person was on their own during the 2009 crash. Now they are supported by government payouts almost immediately (some may have to wait for payments, but they are coming)

The other major factor is the markets were healthy before this happened and Fed and Treasury jumped in fast to prop up and fund the capital markets and banks with unlimited funding. The other things is the blanket forbearance policy. This is the major difference between now and 2009 when they let everyone fail and did not offer any relief for property owners.

[Robert Martinez]

It really depends on how long this lasts. Our collections were in line for the month of April and even beat March collections by a small percent. However, May could be a different story. I think what has helped us is that we are reaching out to all of our 3,000+ residents and making sure they know how to take advantage of these government programs and unemployment benefits. We are constantly communicating with the residents and trying to keep them educated and equipped to weather this storm with us. 

[Jay Hinrichs]

Originally posted by @Nick B.:

MF is already affected as April collections are lower than they should've been by this time of the month. May is expected to be even lower.

While it's true that some people are getting higher unemployment payments than they were making on their jobs, there is a high chance that the money will be sent on things other than rent first. Also, with eviction moratorium in place many tenants will decide to live rent-free for the next 4-6 months or maybe even longer.

YUP in the GFC you had stratigic mortgage defaults  IE people could pay if they wanted to but they were underwater and in non recourse states traded bad credit for living for a Very LOOOONG time for free in their home..

Now with this crisis mortgage companies learned there lesson and were proactive on forbearance etc .. unlike the GFC were it took a good 12 to 18 months to roll that stuff out and it was still very hard to do for most.

Now we have the media pounding the rent moratoriums..  and no evictions.. And i just saw an article today about a landlord in NJ  waiving 3 months of rent on his 12 units.. to the tune of 50k.. And he is a hero.. the Govener said more people need to step up like he is.

So you have a lot of sentiment that paying rent can be an option.. then you have lifelong renters that will simply game the system.

I dont know where it all ends up.. But landlords for the next few months are going to need to be very hands on I suspect. 

[Scott Trench]

Credit scores. 

If your tenant has good credit, they will pay, communicate, be proactive, or otherwise do everything in their power to work with you. I'd be willing to bet a lot of money that any rent strikes, lack of payment, etc. comes overwhelmingly from tenants with poor credit scores. It's the key to tenant screening. It exists for precisely this reason. Which is why so many people hate it.  

No reasonable person with good credit who even has a chance of paying is going to risk their credit score for an undisclosed period of "Free Rent" before ultimately risking eviction and bankruptcy. Few tenants with a 700+ credit score live paycheck to paycheck. Of course, if this did happen, I'd happily work with them (I'll frankly work with any tenant who communicates with me).

The point, however, is that I've yet, in all this time, to come across a horror story involving a tenant with good credit. In all the interactions I've had with fellow landlords. Doesn't mean that you can't find a good tenant with bad credit. Or that there aren't exceptions that prove the rule with the good credit tenants. But it does mean that I believe if your tenant has good credit, you've got excellent odds of not having a problem here. 

[Ryan Daigle]

I don't think you can make such an absolute statement as "won't be affected" without some additional parameters. MFH has already been affected if you just look at April collections. You're probably talking more about to what degree it will be affected, and how it will fare relative to other asset classes?

I do think MFH has the benefit of being supported by several long term demographic trends so I'm very bullish long term. But you can't just wave away the ripple effects of such a deep economic distress as what we're experiencing now either.

I'm still very glad I own apartments and not strip malls!

[Jay Hinrichs]

Originally posted by @Scott Trench:

Credit scores. 

If your tenant has good credit, they will pay, communicate, be proactive, or otherwise do everything in their power to work with you. I'd be willing to bet a lot of money that any rent strikes, lack of payment, etc. comes overwhelmingly from tenants with poor credit scores. It's the key to tenant screening. It exists for precisely this reason. Which is why so many people hate it.  

No reasonable person with good credit who even has a chance of paying is going to risk their credit score for an undisclosed period of "Free Rent" before ultimately risking eviction and bankruptcy. Few tenants with a 700+ credit score live paycheck to paycheck. Of course, if this did happen, I'd happily work with them (I'll frankly work with any tenant who communicates with me).

The point, however, is that I've yet, in all this time, to come across a horror story involving a tenant with good credit. In all the interactions I've had with fellow landlords. Doesn't mean that you can't find a good tenant with bad credit. Or that there aren't exceptions that prove the rule with the good credit tenants. But it does mean that I believe if your tenant has good credit, you've got excellent odds of not having a problem her

here is a good thing for BP to investigate    : What is the average credit score of a renter in the US : ?

while i have no doubt some renters are north of 700 ( I have a couple) and one has asked for rent to be lowered from 3k to 1k. But like everyone I want them to prove they need it.. its a 1.2 million dollar SFR two new constructions on one lot and they are in the front house.. And when they rented they talked about buying it.. so went from Hey I will buy your 1.2 mil prop to I need rent to be 1k.. so not passing the sniff test..

how do you ding a tenants credit..  ?  anyway..  by getting a judgement ? is that really the only way..  just curious.

When i did a Lot of work in the Deep South.. for instance MS the average credit score for the entire state is 600 ..  700 ficos own homes dont generally rent at all.

[Scott Trench]

@Jay Hinrichs You are probably right. I bet that my perception is skewed by my renter pool in metro Denver. 

[Jay Hinrichs]

Originally posted by @Scott Trench:

@Jay Hinrichs You are probably right. I bet that my perception is skewed by my renter pool in metro Denver. 

If you task your team to determine average credit for tenants might be good to do it by region.

Your correct Denver is not Jackson Mississippi.. 

[Bill F.]

@Jay Hinrichs and @Scott Trench FICO scores are pretty skewed, which makes using them non intuitive. Almost half the population has over a 740 with the average being 709, so I don't think its accurate to say that "few" live paycheck to paycheck, since 69% of Americans have less than $1000 in savings, 

Age, as you'd expect is the largest predictor of score. The older you are, the better your score is. 

Here is the score of home buyers: 

At first approximation, it wouldn't be a bad initial guess to say that since home buyers make up a bit more than half the population and their score is 20 points higher than average, that the average renter's score is 15-20 points below the national average, which puts us in the 685-695 range. 

Jay is right that state matters too. Mississippi is average score is around 677 and CO is 718. So, using the rough rule of thumb, of taking 20 points off the states score gives you the average renter gets closer to the truth without having to account for a bunch of confounding factors, but I'd bet the true number is probably lower than that, since renters are younger on average. 

[Susan Maneck]

Originally posted by @William Coet:

Originally posted by @Matthew Irish-Jones:

There has already been an impact. Houses are sitting on the market, and collections are behind on rentals.

My thought is once checks and enhanced unemployment payments arrive, the rent will be caught up.

 That is my presumption as well. My tenants weren't making $600 a week, so this will be great for them. But I don't think can assume that will continue after July. They will still be eligible for unemployment, but not the enhancement. 

[Susan Maneck]

[Jay Hinrichs]

Originally posted by @Susan Maneck:

Touche '

[Evan Polaski]

This is all very interesting.  I started out this downturn thinking we would bounce back quickly with minimal impact.  I am not thinking unemployment will settle in around 9% when we stabilize and start bringing people back to work.  

The forbearance piece is only going to delay what I fear is the inevitable.  People will lose their housing.  

Ultimately, the easiest example is @Daniel Sperling's.  The US economy is based on consumption.  My FIL works for Honda.  Are you in the market for a new car?  

Unfortunately, with any downturn, it instills fear in consumers and for the short to mid-term they become savers.  If everyone start hoarding their dollars, more people lose their jobs at retailers, who in turn effect manufacturers, and the services that provide those manufacturers.

[Jay Hinrichs]

Originally posted by @Evan Polaski:

This is all very interesting.  I started out this downturn thinking we would bounce back quickly with minimal impact.  I am not thinking unemployment will settle in around 9% when we stabilize and start bringing people back to work.  

The forbearance piece is only going to delay what I fear is the inevitable.  People will lose their housing.  

Ultimately, the easiest example is @Daniel Sperling's.  The US economy is based on consumption.  My FIL works for Honda.  Are you in the market for a new car?  

Unfortunately, with any downturn, it instills fear in consumers and for the short to mid-term they become savers.  If everyone start hoarding their dollars, more people lose their jobs at retailers, who in turn effect manufacturers, and the services that provide those manufacturers.

this is all conjecture but i was listening to a economist today that specializes in real estate and the subject of MF came up.  His position was its going to get hammered.. he thought the mid west might not be affected as bad.

but his point was rents will come down.. What will happen is A and B will lower their rents and C class will move up to nicer units leaving C and D in tough shape..  Maybe..  and cap rates go up prices get crushed since A and B are renting for less money..  that was the gist of his thoughts on MF