CARES Act: Multifamily’s crucial pillar

Multifamily market participants are beginning to apply risk premiums to underwriting and deal structuring due to COVID-19. The premiums partially relate to the duration and depth of the crisis. Uncertainties around the Federal government’s next steps to ameliorate the impact of COVID-19, however, are beginning to loom as one of the largest risks. The most serious concerns surround extension of the $2.1 trillion Coronavirus, Aid, Relief, and Economic Security Act fiscal stimulus package (CARES Act).

Rent collections and growth: What, me worry?

Chart 1: Rent payment by week

On the surface, certain major benchmarks indicate apartments are doing better than expected. The National Multifamily Housing Council’s (NMHC) Rent Payment Tracker covers 11.4 million occupied units of professionally managed apartments across the nation. It is the most quoted source for multifamily rental collection. NMHC’s snapshot through the fourth week of July indicates 93.3 percent of tenants made at least a partial rent payment. This rate compares to a 95.3 percent in the same period in 2019 and to a slightly higher 94.2 percent in June 2020. Chart 1 shows NMHC’s breakdown of collections by week for each month of the noted periods. Even more recently, it was reported that 79.3 percent of tenants made payments through August 6.

Chart 2: Rent payment, full month

The impact of the CARES Act, which passed at the end of March, is evident in the NMHC’s month-end reports (see chart 2). Rent collections rebounded from April through July this year. See especially the larger than normal end-of-month payments in April.

If fewer people are employed in a market area, rent collections logically come at greater risk. In light of the lightning fast increase in unemployment from March through May this year, something has to account for that uptick in May and June rent payments - not to mention the noticeable increase in end-of-month payments for April. The likely suspect is the CARES stimulus.

Raising the social floor

Congress and the Administration are at an impasse over how to extend the expired CARES Act. The debate centers on the $600 per week in Federal unemployment benefits that had been supplementing state benefits. The now-expired Federal benefits leave 32.5+ million workers that lost their jobs relying on the benefits of their state unemployment funds. 

Looking at the largest US metro areas in Table 1, state benefits vary from an average of $249.19 per week in Florida to $497.70 in Washington State. With the addition of the CARES Act’s $600 per week, unemployed tenants in each of these metro areas could cover their rent. San Francisco and New York’s unemployed could barely make the payments, but the unemployed in other metros were relatively comfortable.

Supposing a loss of the CARES Act’s $600 per week enhanced benefits however, and the variation in state benefits becomes dramatically apparent. Urban Los Angeles, Las Vegas, Northern California and Portland will likely continue to see a disproportionate impact by loss of CARES Act supplements. The social floor their state governments provide is at the low-end of the range. It does not meet average rent levels for one-bedroom apartments in those cities. 

Impact on growth

Many metro areas’ rental markets around the country have exhibited resiliency to COVID-19’s economic impact. In addition to rent collections, the NMHC tracks rent growth as characterized by responses in its weekly webinars as summarized for 2020 in Table 2. Importantly, several metros are indicating increases in rent despite the economic slowdown. 

Many factors drive rent growth, but a failure to continue the $25 billion a week stimulus to the US economy through the CARES Act will heavily impact rent growth for property owners in these communities in the short term. It may also accelerate the decline in rents for the major Florida cities, Dallas, Houston, Southern California, and others. 

Variability and how to track it

Another factor varies the impact of CARES Act expiration: Unemployment eligibility. The CARES Act covered “gig workers” (freelance workers and the self-employed) as well as people who can’t work because someone in their household was in school or sick. These categories are not covered under state unemployment policies. Certain industries have more gig workers and certain neighborhoods have high concentrations in those industry workers among their residents. The risk of rent shortfalls will surely vary not only market-by-market but at the neighborhood and asset level.

In conclusion

While asset prices are generally holding steady in most markets, buyers and sellers are keen to understand the underlying fundamentals of each asset and neighborhood as it relates to employment concentration, rent collections, and infection rates. Apprise by Walker & Dunlop’s valuation platform was created to synthesize and analyze exactly these kinds of market changes.

Investment dollars will likely continue to flow to the multifamily sector if the virus is suppressed and the Federal government renews consumer-focused stimulus. Compared to other asset classes, investors and lenders perceive multifamily to have a positive risk profile in large part because Fannie Mae and Freddie Mac have offered liquidity to this asset class. 

However, since the prolonged legislative battle over the extension of the CARES Act or similar legislation is on hold until the August recess end, the near-term COVID-19 economic impact on the multifamily sector may worsen. This may also lengthen the expected six to 24-month period before the market returns to growth built into many investors’ current models.