How Will a Recession Affect Rental Values?
With the pandemic now in its third wave in 2021, landlords need to know how an economic recession will affect rental values. Fortunately, we can look at history to forecast possible changes and help landlords prepare.
Most landlords have three questions on their mind:
- 1. Will there be a recession in 2021?
- 2. Based on the past, how do recessions affect rental values?
- 3. How should landlords adjust their rent amount in a recession?
Let’s look at the answers to these burning questions.
Will there be a recession in 2021?
According to the World Bank in their latest edition of Global Economic Prospects, the pandemic will “shrink the global economy by 5.2% in 2020, representing the deepest recession since World War II, and triggering a dramatic rise in extreme poverty…In rich countries, economic activity is expected to decline by 7% as the coronavirus outbreak severely disrupts domestic demand and supply, trade, and finance activities.”
In the United States, National keynote speaker Bernard Baumohl spoke at the 2020 Economic Forecast, where he predicted that “A recession is almost certain—90% likely—if there is no effective vaccine until late 2021 or early 2022 and there is no comprehensive stimulus bill…We clearly need to have a financial vaccine until there is an effective COVID vaccine.” Even though we do now have a vaccine, we also still have new variants of the virus emerging… some of which may turn out to be vaccine-resistant in the future.
The bottom line here is that there is a large possibility of a pandemic-triggered recession in 2021.
How will the recession affect rental values?
Based on the past, what gets hit during a recession is not the rental market but the housing market as a whole. In fact, when recessions happen, typically fewer people buy and more people will rent instead.
In the Great Recession of 2008, the housing market reached unsustainable levels due to a combination of rising home prices, lax lending practices, and an increase in subprime mortgages. Foreclosures and defaults were rampant. The housing bubble eventually burst, leaving the housing market in economic turmoil.
But data from ATTOM Data Solutions showed that rent values were barely impacted in 2008. In fact, the U.S. Department of Housing and Urban Development showed that the average rent for a 3-bedroom property rose at a steady clip, even while home prices were going down. As the economy continued to drop, more homes went into foreclosure, resulting in higher demand for rental housing—thereby increasing rents as well.
So rental businesses can weather (and possibly prosper in) a recession.
Even financially-capable potential homeowners may delay their purchase plans because of the unstable economy. Buying a home involves costly and regular mortgage payments—something that becomes increasingly difficult with unpredictable income and employment. Home value growth will also slow down in a recession, making equity gains more difficult to come by. These uncertainties will keep many people renting longer for more financial flexibility with less responsibility.
How should landlords manage rent in a recession?
As demand for rentals increases, landlords can raise rents in line with prices in the area. However, raise them too high, and you might run into more serious problems in your business.
During a recession, many tenants will be struggling financially - either due to employment instability, lower income, increased debt obligations, or a combination of these factors. Because of this, landlords are more likely to run into inconsistent rent payments, or even applicants who falsify information on their applications in order to secure a property. So, if someone says they can afford your rent, but their financial or employment history seems questionable, beware!
Similarly, if your rents are higher than other similar properties in the area, financially-conscious applicants will go for the more affordable option over yours. This could lead to longer vacancy periods, which will hurt your overall cashflow more than charging slightly lower rents would.
So, to mitigate the financial damage of a recession, landlords have to prioritize quality occupancy of their properties. The last thing you should do is leave your properties vacant or skimp on screening practices during economically uncertain times.
Final Thoughts
An economic recession can cause a great amount of hardship for both landlords and tenants, but preparing for the worst can minimize its impact.
For rental property businesses, rental values will most likely remain stable (or even increase) during a recession. However, landlords still need to prioritize having tenants who pay consistently to ensure business continuity. So it’s something of a balancing act - you can raise rents to keep pace with rising demand for rental properties, but raise them too high, and you may risk experiencing longer vacancy periods, or ending up with tenants who struggle to make monthly payments in full.
Do you think we’re heading into another recession in 2021? How do you plan to handle it?
Image courtesy of Anna Nekrashevich
Comments (2)
There won't be a recession in 2021.
1. From a Covid death rate standpoint, with no data other than my neighbors. I would say about 3/4 of us have had Covid. Several of our neighbors have died. They were old or pre-existing conditions. This is a Real Estate post, so even though I will approach this from a business standpoint, sorry for everyone who has been impacted. With that said, and it being older people primarily being impacted (yes we had a 47 year old die), they will not impact the Real Estate market that much. Basically Herd immunity has kicked in. Vaccines aren't at a large enough percent to have created the significant drops in cases and deaths. Most are in rest homes, thus their house has already been transferred. The other half probably will need their houses settled, if they were single.
Lets say the death rate is 1% and half of those needed to settle a home or 1/2% of the population. Normally a house sales every 7 years or 14% of all houses get sold every year. If you have different figures, still same conclusion. So 1/2% added volume will not have an impact on 14% sales. Summary- Covid deaths will have no impact on recession.
2. Covid sickness standpoint. The majority of us have first hand seen the impact of covid and are now, not relying on News or Governmental reports. The World is not falling in. Again, sorry for your loss or impact to your life. Basically the US economy and the people are ready to open up. The Election is over, so kick the ball time, is over.
3. Covid Economy Back up. The economy is backed up due to reduced Covid transactions. Now if you would have eaten 12 steaks or taken 2 vacations during the last year, your not going to make it up. But there is a shortage of lumber, steel, and other goods. The majority of my contractors are backed up until about June. The only reduction in backlog I have heard is from my Engineering firm. This backlog will be maintained throughout 2021 due to shipping and port docking constraints. Whether it is Steel form China, T shirts from the Philippines, or bottle openers from India, they can't all fit on the existing ships and get through Ports of entry at an increased level.
4. Interest rates- lets say we are currently at 3.5%. If we were to go into a Recession, the Government if they chose to would respond with an interest decrease to stir the economy. Going from 3.5% down to 2.5%, in my mind would create very little additional Real Estate investments. Anyone that hasn't jumped in the market since rates were at 7%; probably won't and people who have jumped in, probably won't expand that much more with a 1% point drop in the interest rate due to extended Collateralization positions.
5. Stimulus package- $1 trillion, $2, $3; won't make a difference. Lets say $1,400 per person. The majority of that will go to disposable products or short-term debt (rent, credit card) reductions. Very little of this will stir the economic pot, it will just relieve debt pressure.
6. Real Estate market- our inventory of existing Houses is extremely low. Viable Commercial property is being chased. Californians, Washington, and Oregon people are buying houses and properties in other states, creating Inflation. There is a shortage in their states, and their houses are being bought up. Currently I have land bought for $500 per acre, valued at $7,000 as agriculture, being sold for $50,000 per acre. This doesn't occur in a recession. There is a standing backlog for more real estate inventory.
7. Stock Market- everyone is happy. We have seen Covid, had an Oil Bust, Travel/Entertainment bust, Stay at home, Vigorous Election process, interest rates at all time lows and not about to climb. What can be thrown at the stock market to make it come down and create a recession?
8. Paper US Dollar. To me the only thing that could readily in 2021 cause a recession is for the US dollar to become devalued. Which is a loss of faith. You have to print money. $3 Trillion Stimulus program is really peanuts compared to our Social programs and Baby Boomers sunsetting. Treasury debt has to be called. $7 Trillion of the $27 Trillion of Treasury debt is owed by Foreign Countries. If the full $7 Trillion of Foreign debt was called, either we would print $7 trillion, or the US institutions would buy it, to save themselves. Even $7 Trillion, is not that much relative to our Social Programs.
9. Social Programs- We have 330 million people in the US. I get a CRP payment on some agriculture ground, so I'm even on the dole. I did turn down 6 months of free payments by the SBA on a project. Different story. 21% of our population participate in Means tested programs, roughly 60 million. Lets say we add 10 million more people. 20 million more. 30 million. To me we have to add about another 60 million supported people, before like my French friends family, they moved out of France to Morocco, because their construction company was taxed to high. I don't see this happening in 2021.
Conclusion- We have 4 major new construction projects going for the next two years. We stop investing when interest rate gets to 9%, slow down at 7%. Going on two vacations this year, doing my part to combat recession. My day car, Toyota Corolla with 330,000 miles and dents on three sides, might replace it this year, but I love it to much, so I won't help the recession this year with a new car purchase. ********Don't see a recession in 2021 and that's where my money is at.********
Action for Recession- Our latest locations we require Autopay only through Credit Cards or Bank Accounts. This improves the Financial quality of our tenants. We have enough personal reserves to help ride out a recession. Recession of 2008 was 18 months.
Henry Clark, over 3 years ago
There won't be a recession in 2021.
1. From a Covid death rate standpoint, with no data other than my neighbors. I would say about 3/4 of us have had Covid. Several of our neighbors have died. They were old or pre-existing conditions. This is a Real Estate post, so even though I will approach this from a business standpoint, sorry for everyone who has been impacted. With that said, and it being older people primarily being impacted (yes we had a 47 year old die), they will not impact the Real Estate market that much. Basically Herd immunity has kicked in. Vaccines aren't at a large enough percent to have created the significant drops in cases and deaths. Most are in rest homes, thus their house has already been transferred. The other half probably will need their houses settled, if they were single.
Lets say the death rate is 1% and half of those needed to settle a home or 1/2% of the population. Normally a house sales every 7 years or 14% of all houses get sold every year. If you have different figures, still same conclusion. So 1/2% added volume will not have an impact on 14% sales. Summary- Covid deaths will have no impact on recession.
2. Covid sickness standpoint. The majority of us have first hand seen the impact of covid and are now, not relying on News or Governmental reports. The World is not falling in. Again, sorry for your loss or impact to your life. Basically the US economy and the people are ready to open up. The Election is over, so kick the ball time, is over.
3. Covid Economy Back up. The economy is backed up due to reduced Covid transactions. Now if you would have eaten 12 steaks or taken 2 vacations during the last year, your not going to make it up. But there is a shortage of lumber, steel, and other goods. The majority of my contractors are backed up until about June. The only reduction in backlog I have heard is from my Engineering firm. This backlog will be maintained throughout 2021 due to shipping and port docking constraints. Whether it is Steel form China, T shirts from the Philippines, or bottle openers from India, they can't all fit on the existing ships and get through Ports of entry at an increased level.
4. Interest rates- lets say we are currently at 3.5%. If we were to go into a Recession, the Government if they chose to would respond with an interest decrease to stir the economy. Going from 3.5% down to 2.5%, in my mind would create very little additional Real Estate investments. Anyone that hasn't jumped in the market since rates were at 7%; probably won't and people who have jumped in, probably won't expand that much more with a 1% point drop in the interest rate due to extended Collateralization positions.
5. Stimulus package- $1 trillion, $2, $3; won't make a difference. Lets say $1,400 per person. The majority of that will go to disposable products or short-term debt (rent, credit card) reductions. Very little of this will stir the economic pot, it will just relieve debt pressure.
6. Real Estate market- our inventory of existing Houses is extremely low. Viable Commercial property is being chased. Californians, Washington, and Oregon people are buying houses and properties in other states, creating Inflation. There is a shortage in their states, and their houses are being bought up. Currently I have land bought for $500 per acre, valued at $7,000 as agriculture, being sold for $50,000 per acre. This doesn't occur in a recession. There is a standing backlog for more real estate inventory.
7. Stock Market- everyone is happy. We have seen Covid, had an Oil Bust, Travel/Entertainment bust, Stay at home, Vigorous Election process, interest rates at all time lows and not about to climb. What can be thrown at the stock market to make it come down and create a recession?
8. Paper US Dollar. To me the only thing that could readily in 2021 cause a recession is for the US dollar to become devalued. Which is a loss of faith. You have to print money. $3 Trillion Stimulus program is really peanuts compared to our Social programs and Baby Boomers sunsetting. Treasury debt has to be called. $7 Trillion of the $27 Trillion of Treasury debt is owed by Foreign Countries. If the full $7 Trillion of Foreign debt was called, either we would print $7 trillion, or the US institutions would buy it, to save themselves. Even $7 Trillion, is not that much relative to our Social Programs.
9. Social Programs- We have 330 million people in the US. I get a CRP payment on some agriculture ground, so I'm even on the dole. I did turn down 6 months of free payments by the SBA on a project. Different story. 21% of our population participate in Means tested programs, roughly 60 million. Lets say we add 10 million more people. 20 million more. 30 million. To me we have to add about another 60 million supported people, before like my French friends family, they moved out of France to Morocco, because their construction company was taxed to high. I don't see this happening in 2021.
Conclusion- We have 4 major new construction projects going for the next two years. We stop investing when interest rate gets to 9%, slow down at 7%. Going on two vacations this year, doing my part to combat recession. My day car, Toyota Corolla with 330,000 miles and dents on three sides, might replace it this year, but I love it to much, so I won't help the recession this year with a new car purchase. ********Don't see a recession in 2021 and that's where my money is at.********
Action for Recession- Our latest locations we require Autopay only through Credit Cards or Bank Accounts. This improves the Financial quality of our tenants. We have enough personal reserves to help ride out a recession. Recession of 2008 was 18 months.
Henry Clark, over 3 years ago