Workforce Housing Withstands the Worst of the Pandemic

It is no secret that high-end, four-and five-star apartment buildings in urban areas have struggled to maintain rents, and in some cases struggled to retain residents, since the onset of the coronavirus pandemic. Rents at these Class A properties nationwide are down about 1.9% since March 1 and year-over-year rent growth is negative 1.7%. These properties compete directly with the hundreds of thousands of units that have been completed over the past year, forcing many to cut rates or offer greater concession packages.

Furthermore, with mortgage rates at record lows, more renters-by-choice may feel inclined to trade in their high-priced apartments in favor of single-family homeownership.

Mid-priced, three-star properties are holding up much better, however. Rents at these Class B properties are 0.4% above where they were on March 1, though year-over-year growth of 1.3% is slower than what it was at this point last year. Still, it is indicative of an asset cohort that so far has remained resilient in the face of the pandemic.

Class B apartments are typically reliant on workforce housing demand, and in particular, demand from workers in the highly vulnerable retail trade and leisure and hospitality sectors. These two sectors have been hit particularly hard by the pandemic. The CARES Act supported rental payments, particularly for renters in these two employment sectors. But with the expanded unemployment benefits expiring at the end of July, this sector could be at risk moving forward.

On the other hand, these less expensive properties still have a lot going for them. Warehouse and distribution employment is down only slightly from pre-pandemic levels, and large industrial users such as Amazon continue to add jobs at new distribution centers throughout the country. Furthermore, three-star properties have less to worry about when it comes to new supply, since rents in new Class A properties are typically out of reach for an average Class B renter.

But Class B rent growth over the past few months varies significantly by market.

At the bottom of the list are the San Francisco, San Jose and East Bay metropolitan areas, which continue to struggle. More expensive coastal markets, which were already stretching renters’ budgets, have seen significant net move-outs in recent months, making it difficult for owners to maintain recent rent levels. Surprisingly, Austin, Texas, which is generally considered an affordable alternative to expensive coastal cities, has seen some of the most significant rent losses. That’s likely the result of vacancies expanding market wide by 2% over the past year, owing to hefty development.

The best performing cities for Class B rent growth include Atlanta, Philadelphia and Phoenix. In Atlanta, Class B rents fell after the pandemic hit, but rents on those properties are now more than 3% above where they were on March 1. The city has seen fewer job losses since the onset of the public health crisis, and its booming industrial sector continues to buoy demand for workforce housing in less-expensive suburban locales.

Philadelphia’s eds- and meds-based economy, and Phoenix’s diverse employment base, are helping keep Class B rents afloat, and these cities benefit from their relative affordability compared to nearby East Coast and West Coast locales.

A major concern going forward is sustainability. The public health situation is improving in many cities nationwide, but the country remains at risk for further outbreaks, particularly with schools reopening and states pushing to reopen their economies. And those renters who remain out of work due to the fallout from the pandemic are receiving less government assistance, which will continue to make it difficult for many renters-by-necessity in the Class B cohort to make ends meet.

While some states such as Georgia, Arizona and Texas have worked to implement the additional $300 per week in enhanced unemployment benefits provided through the President’s recent executive order, it’s unclear whether it will last long enough to keep at-risk renters current on their rental payments. If the $300 per week is sufficient, and additional longer-term benefits are passed by Congress, workforce housing may continue to outperform Class A properties over the next few months.

But if the fiscal support falls short, evictions and vacancies could rise, which would severely erode the pricing power of three-star apartment owners and could lead to a reversal of the rent growth rebound that has been seen in recent months.