A Closer Look at Multifamily’s Widening Cracks

Six months ago in the pre-pandemic world, concerns about matters such as rental growth stagnation for the multifamily asset class would have been laughable. Even as COVID-19 began to spread within the US, multifamily properties held their own, however more recently, a slightly different picture has emerged and cracks in the asset class have begun to widen. GlobeSt.com takes a closer look at what was once a seemingly unassailable asset class.

Recent Signs of Improvement (Amongst Concession Challenges)

MRI Real Estate Software recently reported that move-in numbers for multifamily assets have improved; behind only 3% compared to last year as of September. While new applications have also increased, traffic on the other hand, has decreased since hitting a post-pandemic peak in June. However, traffic still remains above 2019 numbers.

Throughout the pandemic, landlords have increasingly adopted new technologies to drive leasing activity, and as a result, new leasing and move-in activity within the sector has improved.

Additionally, tenant move-outs peaked in June following the pandemic, and have been flat since July. Now move-out activity is below 2019 levels, however, renewals decreased in September and are down compared to 2019. According to the MRI report, the key take away is that tenants are staying in place during the pandemic.

Moreover, a recent report from RealPage also showed an improvement in apartment leasing activity during the third quarter; up 8% year-over-year and more than four times the activity in the second quarter.

Contributing to the signs of progress within the market, and chief among the sector’s escalating challenges is the rising level of concessions. Landlords are offering incentives to prospective tenants, which has likely helped to drive strong leasing activity.

MRI Real Estate Software reported that concession volume is up 21% compared to last year, while concession values are up 13% from last year and have increased 82% since April.

In September, there was a significant jump in concessions from August—which was the first rental month after the CARES Act benefits expired. Concessions now total nearly $6 million.

The concessions, however, have not assisted in stabilizing rental rates. Apartment rents were down 3% in September, despite the increase in concessions. In addition, pricing compared to renewal term is down the lowest since the start of the pandemic for longer lease terms and the highest it has been since the start of the pandemic for shorter lease terms. During the pandemic, many tenants have shifted to shorter lease terms, however, the industry standard of 12-month lease terms have started to normalize again. New lease term prices are trending 3% below 2019 numbers.

Class A’s Rise in Concessions

The pandemic has placed added pressure on the multifamily sector, and as a result, apartment concessions have primarily increased within the nation’s most expensive markets. According to research from Fannie Mae, metros with higher rent levels and more construction activity are experiencing a substantially higher increase in concessions than lower priced metros.

New York currently has the highest concessions in country, which have increased to 12.6% this year from 7.5% at the end of 2019. San Francisco concessions are trailing New York at 11.3%, while Boston follows at 9.6%. Modestly priced markets, like Orlando and Phoenix, have seen a lower increase in concessions compared to last year and relatively low concessions overall. Orlando concessions increased from 5.3% to 6.6%, and Phoenix concessions have increased from 4.9% to 6.4%.

Fannie Mae notes that these markets have also seen the most new construction apartment deliveries this year. In 2020, 450,000 new apartment units have hit the market, but most of these units have been concentrated in 12 metros. New York, Washington D.C., Los Angeles, Houston and Dallas have seen the largest number of new apartment deliveries, while Austin, Seattle and Boston follow with slightly fewer units, and Orlando, Atlanta, Phoenix and Miami complete the list of the top 12.

In terms of asset class, the highest-priced apartments in the most expensive markets are experiencing the highest concessions. Class A apartment concessions have increased from 7.2% at the end of 2019 to 9.2% in August 2020. In addition, this market segment has seen the most new construction activity. This year, 246,000 units have already been completed and another 204,000 units are scheduled for completion this year. As a result, class A concessions should continue to rise.

Class B and class C asset classes have also seen an increase in concessions since April, but to a lesser extent than class A apartments, as these apartments are generally part of the older building stock and not new construction. Class B concessions increased from 5.5% in 2019 to 7.2% in August 2020, while class C apartments increased from 5.6% in 2019 to 6.8% in August 2020.

The rising concessions in class A apartments could serve an indicator for the rest of the market. As class A concessions increase, pressure will be placed on class B and class C assets to do the same. As a result, Fannie Mae is anticipating rising concessions across asset classes in markets with high rates of new apartment deliveries. The agency additionally suggests that apartment demand will increase in step with job gains as the market unfolds over the next 12 months.

Stalled Recovery in Gateway Product / Urban’s Drive

Overall, apartment demand rebounded in many metros in the third quarter, according to a report from Yardi Matrix, which suggests the resurgence helped stabilize the apartment market and kept asking rents from declining further. However, Yardi Matrix reported that while apartment demand has picked up in some areas of the country, recovery has stalled in high-priced gateway markets. As the pandemic sent workers home, these gateway markets experienced the largest exodus of people; possibly resulting in long and difficult recoveries. As a result, these expensive gateway markets and markets with new construction activity have generally seen the most significant decline in asking rents.

According to Yardi Matrix, as rent growth is strongly correlated to the overall expense of apartments by market, higher-end units have experienced the largest decreases in rents and occupancy post-COVID-19. While class B and class C apartments were the first to struggle with rent and rent collections, urban core market apartment rents have begun to drop as the impacts from the pandemic set in.

For example, landlords in San Francisco, Chicago, Los Angeles and San Jose experienced steep drops in rent growth and absorption year-to-date through August. In New York, rents declined sharply as absorption floundered.

Data from RealPage shows that rents have declined 1.7% in the top 50 markets in the US; marking the first time since 2010 that rents in these markets have decreased. By comparison, national rents have only dropped .2% during the same time.

As such, suburban rents are outperforming the urban core. During the pandemic, rents in the suburbs have actually increased by .4%. Though suburban rents have been surpassing urban rents for the last several years, urban markets are experiencing more dramatic impacts from the economic destabilization.

During the first half of the year, occupancy rates within the urban core fell by more than 100 basis points. Upon a decrease in asking rents, the urban core remained stable at or above 95% for the last business cycle, and now nears 93%. While occupancy rates also fell in suburban markets, to a lesser degree, suburban markets have yet to see the same decrease in asking rents.

Class B and C Apartments Will Be Next to Face Headwinds

Though future sector activity could be impacted by various factors, such as unemployment rates, government relief plans, economic recovery and the upcoming election, certain experts suggest that problems could be on the horizon for multifamily assets.

Fitch Ratings’ recent report suggests that US apartment REITs with high exposure to class B and class C assets and properties in gateway cities are vulnerable to the economic fallout of the coronavirus pandemic, due to the risk of urban flight and high job losses among lower-income households.

While federal stimulus payments and expanded unemployment benefits have assisted the apartment sector, Fitch Ratings cites Federal Reserve data displaying that job losses are highest among lower-income households, and others are seeing the same trend. “Low-income workers feel little financial stability,” CoStar Advisory Services consultant, Joseph Biasi told GlobeSt.com in an earlier interview. “You can see that with those making less than $75,000.”

Unemployment among lower-income households increases the risk for apartment REITs with sizable exposure to B and C assets in low-income neighborhoods. Still, the pressure might be partially offset by renters trading down to B and C properties due to greater affordability, according to Fitch.

Other Risk Factors

As previously stated and as others additionally points out, apartment REITs’ exposure to gateway cities could serve as another risk factor. Many speculate that renters will relocate to more affordable suburban and Sunbelt markets as they seek more space in single-family rentals.

“We’ll see some of those higher-income households pushing out into the suburbs and taking advantage of cheaper rents,” Biasi says. “On top of that, they’ll have a little more space because they’re not in a city anymore.”

RCLCO forecasts that demand for build-to-rent homes is set to increase. “Given demographic trends RCLCO forecasts much greater demand than the current pace of production, which could result in a significant supply shortfall, suggesting the sector presents a strong market opportunity in the coming decade,” according to the RCLCO report, written by managing directors, Gregg Logan and Todd LaRue.

If the urban flight continues, concessions are likely to continually rise in class A apartments in gateway cities. Enduring geographic and age-related demand shift preferences by renters could limit longer-term growth rates within these assets, according to Fitch.

Though larger than expected same-store net operating income declines could pressure ratings, most Fitch-rated entities can withstand anticipated levels of delinquent rent payments that are consistent with recent trends. Still, Fitch says government-mandated moratoriums on evictions, high unemployment and lack of federal stimulus permanency are negatives for REITs’ top line.

Late Loan Payments Spike / Recent Spike in Late Loan Payments

Though certain entities have been able to withstand recent delinquent rent payments, the sector is currently experiencing a spike in late payments for both agency and non-agency loans, according to Moody’s Analytics REIS.

In September, late payments for agency loans rose to 1.4% from 0.46% in August. Non-agency late payments rose from 1.83% in August to 2.78% in September.

“Now, thirty days of performance does not make a trend, but the magnitude of change is noteworthy,” according to REIS. “Nevertheless, the amount of the change is minuscule relative to changes we have witnessed in loans for retail and lodging properties. We will be watching this carefully as remits come in this month and thereafter.”

According to Trepp, the special servicing rate hit its highest mark since May 2013, increasing 44 basis points to 10.48% in September. In August, the rate was 10.04%. While retail and lodging drove the increases, multifamily special servicing rates rose 10 basis points to 2.66%.

Expecting further issues in the multifamily sector, principal, managing director and global head of Avison Young’s asset resolution team, Michael T. Fay states, “What is going to be interesting is what happens to multifamily with the expiration of the unemployment money that was coming out from the stimulus packages.”

While landlords have been challenged to make rent payments throughout all sectors of commercial real estate, industry stakeholders will continue to watch closely as cracks continue to emerge within the market.


According to the National Multifamily Housing Council’s Rent Payment Tracker, apartment rent collections declined by 2.4% in September, and fewer renters made a full payment in mid-September than in mid-August.

Leading the urban core in rent decreases was Austin’s Downtown/University submarket, which declined by 8.4%. Downtown San Francisco and Downtown Los Angeles rounded out the top three on the list, with rents falling 7.8% and 6%, respectively. As a result, the list included four markets in California, which until the pandemic had seen strong rent growth, and in markets like Boston, which are both expensive and heavily supplied.

Austin was really the only anomaly on the list; however, the Real Page report notes that it has been both a high-development market and a high-performing market at times during the last decade, and as a result has seen big increases and decreases in rental rates. In 2009, apartment rents fell 13%—the steepest decline on record, while rents climbed 14% in 2011. These swings have become typical for the market. Furthermore, the Downtown/University area is the most expensive neighborhood in Austin, which is on trend with the other markets.

Affordable Housing Growth The migration to lower-cost housing could eventually give a boost to affordable housing, which is one demand driver for the asset class. Earlier this year, Novogradac, a national accounting and consulting firm, released a report saying that occupancy rates and rental income at low-income housing tax credit properties recover quickly after economic downturns. As the economic dislocation continues, market-rate apartment residents will start to seek more affordable housing options, increasing demand for affordable units. In a separate report, MRI Software’s Brian Zrimsek predicts that affordable housing demand will not decline.

Other Demand Drivers John Burns Real Estate Consulting thinks short-term suburban rentals, which it defines as one-to-two-year lease terms—could also be demand drivers for residents looking for work-from-home space and outdoor access. John Burns believes these opportunities will be most available in suburban markets. Renters are seeking larger units in these areas, usually two-to-three bedroom apartments. These renters are less concerned about density, walkability and access to amenities, particularly as many restaurants, retailers and bars are shuttered.

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