Where does the rental market stand today? Seems like there’s positivity in the papers on Wall Street with the NASDAQ — somehow — reaching new heights. However, the main streets indicators are mixed with shuttered businesses and streets full of protesters.
But it’s important to note that even with everything that’s going on, the average American consumer seems to be getting over the shell shock that were the months of March and April, when COVID-19 first hit. Confidence rates are starting to mirror 2012 indexes.
If you’ve been around the block, then you know that 2012 was one of the best years to get into real estate investment because of the enormous gains in property value that followed. But I doubt it will be that good. The market hasn’t dropped enough for that type of rally.
Below, we will go into the more macro data that will likely affect any real estate investor and how. From there, we will drill into property types that are faring rather well in the current market and others that have seen better days.
Let’s try to separate ourselves, for a moment, from the pixie dust on Wall Street and the headlines in the news, so we can figure out where the rental market really stands and know how to stay in front of the chaos. First up, macro data.
To economists’ surprise, because this level wasn’t expected, unemployment is actually looking like it’s heading on down as the market reopens, with jobless claims dropping consistently since mid-April. Businesses are rehiring at least some of their workforce (see chart below), which has created a significant bump in employment from April.
That said, unemployment isn’t going down especially quickly, and with COVID-19 rates rising, it’s now foreseeable that more bankruptcies for small and medium-sized companies will be coming as their PPP loans dry up, hampering the comeback of local job markets.
Nationally, for Q1 of 2020, the vacancy rate was sitting pretty at 6.6 percent for housing. And that’s tough to beat, given that people move and places need time to turnover and release.
A low vacancy rate is always good because it (usually) means you have your units filled with tenants. New numbers of this on a national level are coming, but given what I’m seeing in Phoenix and Tucson, it may be possible we get closer to 7.9 percent due to specific property type getting hit, which I’ll go into in a minute. (Phoenix is a primary city. Primary cities tend to trend together, kind of like the DOW or S&P.)
And with that said, I have all my investors write in a 10 percent vacancy before buying, because it’s more conservative, and because much of the time, we reposition the property to make it more valuable. That means we usually have to evict more tenants upfront.
Are people using them for things they need like food, gas and rent? Or are they putting the money into Starbucks and Apple stands? Well, according to the average savings rate, households are saving “a record amount of new income.”
It looks like we are being very conservative with our savings overall. So can we just applaud ourselves for a moment? We just hit the highest saving rate I could find by a lot — and I went all the way back to 1958.
In April, it was at 32 percent, but that’s tapered down to 23 percent in May. For comparison, the closest rate was 17 percent in 1975. In the short term, I’d say the increased savings is a good thing. People are saving but are still willing to open up their wallets a bit, given the sizable May drop in savings.
It’s a point for the “pent-up demand” argument because it looks like there’s money to spend if the market comes back soon. And if the market doesn’t jump back, at least Americans are being frugal with discretionary spending, heightening our chances as property owners to collect the rent.
So, at the 10,000-foot level, it’s looking like the average consumer or tenant is in a decent spot with businesses rehiring, stimulus checks being spent wisely and vacancy rates that started at very strong levels — all of which reduce the risk of tenants reaching a tipping point on making rent.
The main tipping point, in the short term, will be the $600 federal stimulus checks ending at the end of the month. But, for the moment, there’s far too much speculation (both good and bad) on that to give any meaningful analysis just yet.
This is generally positive data, but it doesn’t necessarily mean it will translate to your specific rental type. And buying and working this new market correctly is imperative to get any benefit from your rentals.
How are rentals performing?
Because vacancies definitely don’t tell the whole story, we have to ask — how are rentals really performing right now? What rental types are getting hit most right? And who’s faring surprisingly well?
Since Fort Lowell, my family company, is rooted in property management, we’re part of a few industry groups like the National Association of Residential Property Managers (NARPM). So, we get these charts filled with other managers’ self-reported performances on the rents and how they’re handling things.
Note that NARPM is only collecting data on single-family home rentals. So, here’s May’s summary of what type of tenants are paying per an average of hundreds of management companies.
For June, the rates are looking pretty similar. We’re seeing the same activity as May as well.
Also, in the reports, management companies briefly go over new best practices. It seems to me what works best is essentially what I said in this video that goes over, in depth, how we’re handling managing tenants.
With our program, we’ve collected 97 percent of rents for June and July, making us a top performer. Note that a big portion of our portfolio is lower-income multi-family rentals, one of the harder-hit sectors. We hover at 99 percent collection for single-family homes. I’ll take my trophy now, thanks.
Which properties are getting hit the hardest?
Student housing has had better semesters, especially if they haven’t announced a reopening of campus yet, making leases for next year very soft. That said, we’ve collected nearly all of the rents for current leases. Gotta love those parental guarantor forms.
I don’t see this renting issue directly getting fixed until the college your property is next to announces when it’s reopening. Currently, we’re pivoting the tenant base on many of these properties and pushing marketing efforts for what little tenant base is left. This market is brutal right now, and only the innovators in this sphere will hold onto their leveraged properties.
Rentals meant for the elderly aren’t faring as well, which makes sense. People and the elderly are afraid of sharing a space with four of five other people.
I’m no expert, but this one will likely continue to be a huge issue until a vaccine is deployed. Even then, I see this tenant base just being more apprehensive moving forward.
As a counterpoint, the elderly are one of the fastest growing markets. So, it might get back to normal and continue to grow through sheer tenant population growth and, sadly, their lack of better alternatives.
Lastly, and unsurprisingly, affordable housing that’s not part of section 8 or a voucher program is getting hit due to job losses and cutbacks. The stimulus checks are keeping them afloat in the very short term, but anything short of a full market reopening with strong local rehiring will result in lower performance. If the stimulus checks don’t appear in their bank accounts soon, collections will go down.
Which properties are performing best?
Generally, the average-priced, single-family rental is doing pretty well. Nearly all of our single-family rental homes are paying rent. In fact, this property type is still booming.
For example, we put up three homes for rent in Phoenix on the same day. For days, we got over 100 emails and texts per day, and within 36 hours, we had eight to 10 applications on each home.
This is due to a few factors. First, the Phoenix single-family home market is red hot and has been for years with supply far below our growing demand. Second, many people haven’t put their homes up for rent due to the outbreak. Financially speaking, this is a mistake given how low current supply is in Phoenix. Lastly, we have a heavy focus on online marketing.
If you don’t have a strong online presence, your rentals will suffer. People’s habits are changing when finding, viewing, signing and maintaining real estate. This subject is entirely another article, but the summary is that you need a strong online presence. The stick in the yard with a “for rent” sign won’t go as far as it used to.
If you’re the type who just reads the last paragraph
The market overall is showing that rentals have been bruised but have every ability to come back. However, some property types, like college housing and elder care, will likely require some adjustments to maximize their returns.
For my Arizona market specifically, our infection rate (25 percent) is the only thing that’s truly positive. The growth of COVID-19 nationally will likely hurt collection rates in the coming month or so, but by how much remains to be seen.
Lastly, given new tenant habits and needs being created because of the outbreak, you will need to ensure you have a strong online presence or your properties won’t fill up like they used to.