When all else is lost, humanity turns to sage aphorisms for comfort. Among those I’ve encountered recently, what sticks with me the most is attributed (possibly inaccurately) to Mark Twain:
History never repeats itself, but it rhymes.
This is not to be confused with another saying I recently discovered and enjoyed: “History does not repeat itself, but ignorance often does.” I couldn’t find a source to provide attribution, but I sure wish I could!
It is unquestionable that this time is different. Our local, much less national and global, societies and economies were wholly unprepared for a viral pandemic of this magnitude. Although the world has experienced pandemics in the past, it is not what we’ve studied and braced ourselves for as the cause of an economic slowdown.
Although this time is different, and we have not seen this same type of trigger to halted economies, (1) people’s reactions and (2) market results are likely the same as past economic events.
Hence, the rhyme across history.
Focusing squarely on the economics of current events and impacts on the apartment market, people’s reactions are strong, swift, and mostly fear-versus-fact based. And to the extent there are facts, the facts are often slanted towards fear.
Just yesterday, the Wall Street Journal reported Nearly a Third of U.S. Apartment Renters Didn’t Pay April Rent. Citing a National Multifamily Housing Council webinar series tracking April rent payments (available HERE), the WSJ scoops that only 69% of renters paid rent as of April 5th. If you listen to the webinar, you learn that (1) in a “normal” month, on a national basis, only 82% of rent is collected; and (2) once they draw the data out to April 6th (a Monday versus a Sunday), the amount of delinquency is likely in the high single digits (i.e.: less than ten percent).
Is collecting only 90% of rent good?
Generally speaking, no.
But, amidst current conditions and reporting on only the first 6 days of the month, I’d say that collecting 90% is not too shabby and call it a win for the national apartment market.
Further exacerbating reactions of what is to come, announced in a piece by the PSBJ scarily titled “The Seattle-area apartment market is about to cannibalize itself,” a survey by Commercial Analytics concluded that “76% of tenants are seeking some form of [rent] relief.”
I don’t know what sort of controls were put in place for this survey, yet in our own informal surveying of management companies with oversight of approximately 10,000 units around the Puget Sound, they reported around 5% of renters inquiring about rent relief in some form or fashion.
“In our surveying of management companies with oversight of approximately 10,000 units around the Puget Sound, they reported around 5% of renters inquiring about rent relief in some form or fashion.”
For me, claiming that over 75% of renters are requesting rent relief is a bridge too far to cross—at least to form opinions and make business decisions.
I don’t at all disagree that there is a warranted and appropriate cause for concern given the circumstances a Stay Home, Stay Healthy order presents; however, we must temper concern with patience and thoughtful study of the market.
How the current economic environment will impact the Seattle and larger Puget Sound market is yet to unfold. There are both near-term and long-term impacts that must be measured.
In previous economic slowdowns or recessions, the apartment market generally experiences an uptick in vacancy, followed by collections issues and falling rent levels.
This time will be different. I can’t opine any more near-term than right now—as in today. As of April 10, 2020, the most pressing issue is collection of rent.
Given that people are literally prevented from moving about, changing apartments is hard to do. Furthermore, the outside influence of a ban on economic evictions will preserve rent levels to a certain extent—or at least delay any decline. Accordingly, the leading indicator of economic distress in the apartment market is collections, not vacancy rates – or even rental rates for that matter
On Wednesday (April 8) of this week, Equity Residential, one of the largest REITs in the nation, announced in a press release that they collected approximately 93% of cash receipts for their properties—inclusive of nearly 10,000 units in the Puget Sound region. This is not inconsistent with early reporting from the major management companies that were part of NMHCs rent forecast.
Having real data on nearly 80,000 apartment units—the size of Equity Residential’s portfolio according to NMHC’s 2019 Ranking Top 50 List Apartment Owners—demonstrating around 7% uncollected rent by the 8th of the month, is real data upon which we can hang our hats.
Using this result as a proxy for the market proves useful, especially when compared to our survey of additional owners and managers through the region. The spread so far this month is around 5% collection loss for more urban, higher-end rental units to what is likely a peak of 15% for Class C rental units—and these results are still preliminary, providing for further collections during the month as a result of payment plans and issuance of subsidies not yet issued to renters. This is a far cry from 1/3 of all renters not paying rent.
“Given that current data suggests that collection loss across all market types and segments is likely no more than 10%, “the sky is falling” news lines are not only misleading—they are inaccurate.”
Myriad impacts are not yet felt by the market. Some arguments lead to lower collections as this circumstance drags along, yet the counterargument is that by May apartment renters will receive unemployment insurance checks and Federal subsidies under the CARES Act.
Given that current data suggests collection loss across all market types and segments is likely no more than 10%, “the sky is falling” news lines are not only misleading—they are inaccurate.
The long-term market results on the overall economy are certainly not yet known and far too difficult and speculative to quantify. It would be easy to extrapolate the massive unemployment rates cratering the economy, and that certainly sells papers; however, the exogenous event that created the current circumstance will also dissipate over time—as occurs with all pandemics.
As is often said, sunlight is the best disinfectant, and this event is certainly shining a glaring light on economic instabilities across all economies: corporate debt, inflated asset values, and other ills borne out of cheap debt offered for far too long.
As the tide goes out, it will expose who is missing their swimsuits. But those focused on investing in Seattle’s apartment market—albeit not immune—are vastly insulated from the broad damage that will be part of global economies for the next few years.
I wish I could say that I had the prescience of monitoring viral outbreaks in China in the Fall of 2019, but I did not. By that same token, I can say that my recent blog posts on Seattle’s resilience were not guided by knowing of impending financial turmoil.
- Part 1: Seattle’s Resilience – Demand (1/24/2020)
- Part 2: Seattle’s Resilience – Unique Tech (2/14/2020)
- Part 3: Seattle’s Resilience – Market Cycles (3/13/2020)
Yet it just so happens I have vast belief in Seattle as one of the most economically resilient markets in the Unites States, if not the world. Given Seattle’s focus on world health, biosciences, immunology, and predictive analytics in healthcare, I have no doubt that Seattle’s companies, technologists, and entrepreneurs will help lead the world to better protections and responses to future pandemics.
My optimistic outlook is guided not only by the data, it is also guided by the fact that we’ve been here before.
Whether it was the Great Depression, Oil Embargo, Savings & Loan Crisis, Tech Bubble Bust, or Great Recession, there is a light at the end of this tunnel. And when searching for the light from within the tunnel, it always seems much further into the future than when looking back retrospectively.
In times like these, leveler heads will prevail, and I know of precious few apartment investors who wish they waited longer to wade back into the apartment investment market after nearly every financial downturn of the last 50 years.
Our team is positioned to help lead our clients through and out of these challenging times, and we are working every day to Stay the Course!