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Few Austin-area renters had difficulty paying rent in April amid the COVID-19 pandemic, top multifamily brokers said.

Property owners polled by Newmark Knight Frank Vice Chairman Patton Jones said only 2% to 5% of renters requested some form of rent relief due to losing their job or some income during the pandemic.

“Owners frankly expected worse and are taking a cautious approach,” he said.

Charlie Cirar, vice chairman at CBRE Group Inc., said property owners have told him less than 3% of renters have needed assistance.

That’s good news for both renters and landlords alike, but the worst is likely yet to come, experts say, as more workers will potentially be laid off or furloughed in the next two months.

“The concern in multifamily is what will be the degradation of the rent roll over the next few months,” Jones said. “How many people in your community will not be able to pay rent?”

Right now, many small businesses are trying to weather the storm and continue to pay their employees even when little to no revenue is coming in. Paycheck Protection Program loans offered through the $2 trillion federal stimulus bill, the CARES Act, could provide some relief to small businesses and allow them to keep employees on the payroll in the coming months. Still, some local banks have had difficulties getting those loans processed.

Out-of-work renters’ ability to pay rent in May and June will also depend on how fast unemployment and federal subsidies kick in, Cirar said.

“We’ve run the numbers, and if you make under $58,000 a year as an individual, and you were laid off from a job [due to COVID-19], you will actually make more money with the state unemployment and $600 a week federal subsidy [for 120 days],” he said. “A lot of renters are going to be on very equal if not better footing, up to that income level.”

Potential trouble ahead

The pandemic could deal a major blow to the multifamily industry as the brunt of the economic fallout could come during what’s usually the height of the renting season: April, May and June. Those three months are when more moves occur, and when rents tend to tick up.

Data provided by CoStar Group Inc., which owns Apartments.com, shows that rents have already dropped 1% since mid-March.

ApartmentData.com, which surveys multifamily properties in 12 southern markets, is seeing a similar trend.

“So far in April, with 35% of the properties having been surveyed already, we are beginning to see the decline in rental rates,” said Cindi Reed, director of business development at ApartmentData.com.

On average, monthly rents are trending down about half a percentage point, she said, from $1,313 to $1,307.

Up to this point, at least, the Austin metro has seen some of the highest rent growth in the country. Year-over-year rent growth in March was at 4.6%, according to RentCafe.

Jones said it’s too early to say how rental rates will be affected by the pandemic and shelter-in-place orders.

“I think it is hard to determine if rental rates are down because everyone is focused on occupancy,” he said. “If someone can’t pay their rent, then the rates aren’t going to matter.”

Cirar said it’s safe to say that rents will be at least flat in the second quarter of 2020.

“I don’t think anyone is looking at raising rents from that standpoint,” he said.

Rent growth isn’t the top concern for landlords right now, though.

“Every apartment owner I have spoken to, that is their No. 1 priority, keeping their renters in place and taking good care of them,” Jones said.

Multifamily sales slow

Like in other sectors of the real estate market, sales of apartment communities have come to a standstill with many major cities under some form of shelter-in-place order.

“The market is frozen in time,” Jones said. “Transactions are not happening.”

That doesn’t mean he isn’t getting plenty of phone calls, especially from private investors itching to pick up properties in off-market deals.

Jones said many investors are eager to complete 1031 exchanges, which allow investors to avoid paying capital gains taxes when they sell an investment property as long as they reinvest the proceeds from the sale into a similar property within a limited time frame.

Even if sales contracts are signed right now, Jones said, the due diligence can’t be completed during the shelter-in-place order.

“Right now, we have physical barriers to actually getting a deal done,” he said.

Additionally, it would be challenging to value multifamily properties when it’s unclear how many renters will be paying rent in the next couple of months.

Valuation of multifamily properties is based on the income and expense of a property — the net operating income.

“If your income decreases, then your net operating income decreases, and the value of the property decreases,” Jones said. “When we are selling apartments, we are selling cash flow. If the cash flow decreases, the value decreases.”

Jones is optimistic, though, that transactions will resume quickly in the next couple of months because of the sustained strength of the Austin market.

“Right now, it is a wait-and-see approach,” he said. “We have seen the major institutions take the sidelines. Private investors are calling and want to continue doing business. They loved Austin before, and they love Austin today, and they are wanting to get into the game.”

Experts, though, expect the development of new apartments to slow as lenders will exercise caution in the months to come.

“Things that are existing will proceed,” Jones said. “If it’s something new that hasn’t been teed up yet, that hasn’t been financed yet, I think that is going to move slowly, and I think you will see the supply pipeline drop in the next couple of years as equity providers — in New York, Boston and Chicago — become very cautious on new construction of multifamily.”

Despite a potential slowdown in new development, the current pipeline of apartments is strong.

In the city of Austin alone, about 4,000 units are expected to be delivered by the end of May, Reed said, and another 4,600 by the end of 2020.

“While construction may be slowed down on some of these sites, I still see a healthy amount of delivery in 2020,” she said.

Because of a glut of apartments delivered in 2019 — about 11,200 units — management companies in Austin were already offering more concessions to renters, Reed said.  With an additional 8,600 units and the “pain of the coronavirus, I would imagine the impact will lower our rent growth throughout the remainder of this year.”


Publication: Austin Business Journal

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