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Why Multifamily Rents are Holding Up Better than Expected

Despite mass unemployment and underemployment, multifamily rental payments have held up far better than many industry experts expected amid the economic wreckage caused by the spread of the novel coronavirus.

More than 36 million people have filed for unemployment in recent weeks and millions of others working fewer hours and taking reduced pay. That’s amid new estimates that real GDP growth for the second quarter will come in at -42.8 percent. Toss in a backdrop in which, as of December, 69 percent of Americans had less than $1,000 in savings accounts, and it would seem to paint a bleak picture on the ability of renters to meet their obligations.

Yet 87.7 percent of apartment households made a full or partial rent payment by May 13, according to a survey of 11.4 million professionally-managed apartments across the U.S. by the National Multifamily Housing Council (NMHC). That’s up from the 85.0 percent who had paid by April 13, 2020, during the first full month of the crisis caused by the spread of the coronavirus. That’s also down from the 89.8 percent of renter households who made rental payments the year before, when the U.S. economy was still strong and long before the coronavirus began to spread.

“Once again, despite the economic and health challenges facing so many, we have found that apartment residents who live in professionally-managed properties are meeting their obligations,” said Doug Bibby, NMHC President.

So what gives?

There are a few things at work. For one, NMHC’s dataset is weighted towards renters more likely to be able to continue working their jobs remotely and those with some savings as a backstop.

NMHC gathered its data from five leading property management software systems: Entrata, MRI Software, RealPage, ResMan and Yardi. It does not represent all apartments in the U.S. For example, the data does not include many government subsidized affordable housing properties.

“These excluded properties are the ones more likely to house residents experiencing financial stress,” says NMHC’s Bibby.

The data also does not include smaller apartment properties that typically don’t use those software system.

“There are thousands and thousands of buildings with 10 units, 20 units, 40 units,” says John Sebree is the senior vice president and national director of Marcus & Millichap’s Multi Housing Division. “They generally don’t have property management software…. However, they generally have personal relationships with their clientele. [So,] their collections are a little better.”

In all, the percentage of renters who made full or partial payments at less-expensive, class-C apartment properties continues to be lower—by about five percentage points—than the percentage of renters at class-A or mid-tier class-B properties who made payments.

“There’s a little more financial distress among residents of lower-priced Class C properties,” says Greg Willett, chief economist for RealPage, Inc. “Many of those who held jobs in hard-hit industries like hospitality and retail stores live in the nation’s class-C apartment stock.” These families often earn lower incomes and have little or no emergency cash reserves to deal with income interruptions, says Willett.

Still, even in class-C stock, the percent paying rent remains high.

A big reason: The expanded federal $600-a-week unemployment benefits put in place as part of the CARES Act on top of whatever each state normally pays out has left many workers making more money now than when they were in their jobs, enabling them to keep up with rental payments.

As an analysis from explained, Congress arrived at the $600 a week figure by looking at the national average unemployment payout of $370 per week and the national average salary for unemployment recipients of $970 per week. So the goal of the $600 was to make up the difference.

But given the income inequality in the U.S., far more workers’ wages are below that average figure than above. The net result has been that for millions of workers, being unemployed has led to a rise in their weekly pay. The multifamily sector has been a backdoor beneficiary of that federal largesse, since it has translated into more people being able to pay rent than one would expect with an official unemployment rate approaching 15 percent.

“The enhanced unemployment benefits provided by the CARES Act are helping the financial burdens of those who have lost their jobs,” says Willett. “These households appear to placing rent payments as a top priority.”

The issue going forward, however, is that the expanded benefits are scheduled to expire at the end of July. So the concern multifamily property owners were feeling before the CARES Act was enacted could rise anew later in the summer if the economy has not sufficiently recovered.

“As current federal support programs begin to reach their limit, it will be even more critical for Congress to enact a meaningful renter assistance program,” says Bibby. “It’s the only way to avoid adding a housing crisis to our health and economic crisis.”

Regional differences

Rental payment rates are also varying by region.

“Rent payments tend to be best in the places where the local economies are heavy on the tech sector or government defense tend to have the high shares,” says Willett. May’s best collections through about the middle of May 2020 are in Sacramento, Calif.; Virginia Beach, Va.; Riverside-San Bernardino, Calif.; Portland, Me.; Portland, Ore.; Denver, Colo.; and San Jose, Calif. “Some 93 percent to 94 percent of households in these places have paid their rent.”

Trouble spots include New York City; New Orleans and Las Vegas. These are locations where the spread of COVID-19 has been especially challenging or where tourism is particularly important to the local economy. The payment figures also are well under normal in Los Angeles, says Willett. Higher-cost markets like New York and Los Angeles are also cities where the expanded federal unemployment payouts are less likely to result in unemployed workers making more than they did while they had jobs.


Source:  NREI

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Lease Insurance Could Come Into Play Amid COVID Crisis

Millions of apartment renters across the U.S. have lost jobs and income in the economic crisis caused by the spread of the novel coronavirus. Many are working with landlords by making partial payments and creating payments plans.

But another aspect of the industry is being tested by the crisis: lease insurance products that have replaced security deposits for some renters.

Founded in 2015, Leaselock provides lease insurance that covers damages and lost rent for roughly one million apartment units. At the properties that use LeaseLock, renters don’t have to provide a security deposit to move in. Instead, they pay a deposit waiver fee of $29 a month for a standard lease insurance policy. In return, LeaseLock agrees to insure the property and pay for potential losses on the apartment, including up to $500 in damages and $5,000 in lost rent—or even $7,500 in high rent markets.

LeaseLock does not carry to risk of these policies itself, but sells the risk  to reinsurance companies. Claims on LeaseLock’s lease insurance are triggered when a lease is terminated with damages or an unpaid balance owed. So far these reinsurance companies have not significantly raised their prices for new policies.

“It works well for the resident and it works well for the managers,” says Rick Haughey, vice president of industry technology initiatives for NMHC. ”But how do you price that risk and has that changed?”

More than 26 million people have filed for unemployment in the five weeks since cities and state began to order non-essential businesses to close and residents to shelter in place to the slow the spread of the novel coronavirus.

“There’s risk attached to every renter now,” says Mark Stringer, executive vice president for Avenue5, an apartment company with 70,000 units under management, including thousands covered by LeaseLock. “In the past, you may have had some owners say, ‘Well, we have residents that never lose their jobs so we don’t have to worry.’ Well, now you have to worry.”

For April, the effects have been relatively muted.

The amount of rental income collected by apartment companies in April 2020 dropped 7 percent compared to the monthly average set earlier this year, according to LeaseLock.

That’s similar to National Multifamily Housing Council’s rent payment tracker which found that 89 percent of apartment households made a full or partial rent payment by April 19 in its survey of 11.5 million units of professionally managed apartment units across the country.

“It is not as dismal as we thought it was going to look in April,” says Reichen Kuhl, president, founder and chief of insurance and legal for LeaseLock, “Renters who can pay have paid.”

Numbers for May are expected to be worse, however.

Meanwhile, LeaseLock is helping its clients negotiate with residents who are having trouble.

“Right now, 100 percent of people having trouble are being offered concessions,” Kuhl says. “Almost all of these are good, steadily-paying residents, and apartment companies want to keep good stable residents in place.”

So far, renters in trouble seem to be taking these deals, according to early data from cities where the coronavirus struck first. In Seattle and Los Angeles, which issued “stay at home” orders relatively early, the share of people who paid only part of the April rent is much higher—and the amounts being paid seem to match the “50 percent” being offered by many apartment companies, according to LeaseLock.

“We did see a concerted shift towards partial payments,” says Rochelle Bailis, vice president for LeaseLock. “That shift was pretty dramatic in the hardest hit cities.”

For example, Irvine Company is enabling renters to defer 50 percent of their April and May rent payments over a six-month period, interest-free. All renters have to do is “request rent assist” to create a new payment schedule.

Many other apartment companies have halted evictions and offered similar plans – following the advice of trade groups, including both the National Multifamily Housing Council and the National Apartment Association.

Usually, when a renter is more than a month late in paying rent, the property manager will issue a “pay or quit” notice demanding payment. Cities, states and federal agencies have also created moratoriums on evictions covering a wide patchwork of jurisdictions.

All this comes as lawmakers consider further regulating or even outlawing security deposits, which may push more of the industry towards companies like LeaseLock, or the creation of their own installment plans.

“States are putting more regulations on security deposits,” says Rick Haughey, vice president of industry technology initiatives for NMHC. Legislators argue that having to pay a security deposit can be a barrier for many people to renting an apartment. “Most people just don’t have two month’s rent,” says Haughey.

In Cincinnati, Ohio, landlords must now offer renter alternatives to paying a security deposit, according to that city’s new Renter’s Choice Law, which went into effect in April 2020. Lawmakers in Philadelphia have proposed legislation (House Bill 2427) that could lay the groundwork for total deposit replacement, according to Kuhl. Other new rules include limits on the amount property managers can collect as security deposits, how the money is held in escrow and in some places requirements that the deposit can be paid in installments.


Source:  NREI

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