The Rental Housing Outlook Is Bright, But Look Below The Surface
So far, so good for the apartment business, but there’s a yellow flag on the track. Everybody thought that when forbearance came up, a lot of tenants would stop paying their rent. Well, tenants kept paying their rent—so far. But some of the artificial supports are about to be taken away, and the apartment business will have to stand on its own.
What are the top executives in the real estate industry thinking about the next 12 months? A survey of C-suite and other top real estate executives is included in a new report by RCLCO, which I coauthored.
Rental housing overall is not seen as being in as bad shape as commercial real estate, placing it in “late stable” to “early downturn” status. This sector has maintained high occupancy rates, and surprisingly high rates of rent collection, even with rent forbearance and restrictions on evictions.
The study shows a one-year outlook that varies according to type of rental. Class-A apartments are expected to be feeling stress one year out, but a large number of respondents expect this asset type to still be “stable.” Nearly 20% expect that Class-A will be fully past the downturn and moving on into recovery. The expectations for Class-B and Class-C are somewhat similar, but with higher numbers of “don’t know” responses, reflecting the uncertainty surrounding the ability of middle-class tenants to continue to pay their rents.
Across all rentals, operators are focused heavily on preserving cash flow. Operators are working with tenants on payment plans, waiving late fees, giving discounts for on-time payment, and accepting credit card payments and security deposit conversions. Retention is a very high priority right now.
Class A rents have edged down more than B and C, but the collection rate has been down the most for Class C. There are 580,000 units set to deliver over the next 12 to 24 months, so that could put some additional downward pressure on rents.
The outlook also varies when one looks at specialty types of rentals. The prospects for co-living and micro units are murky, even to experienced industry veterans, with a large share of respondents expecting continued downturn conditions a year from now, and a huge 40% “don’t know” response.
Single-family rental (SFR) is expected to be “early stable” or “late stable” by a year from now. This segment of the rental market is widely considered to best, strongest, and fastest-growing major segment of rental real estate.
That small minority who see SFR being at the “bottom” today (5%) are a much smaller minority when projecting out a year from now (only 2%). Major players are getting into this segment, and RCLCO expects a tripling of the volume of construction of single-family homes for rent within the next few years.
The category surrounded by the most angst is student housing. Owners and developers of housing at or around universities, marketed toward students, have to confront the question of the level of future demand. Although collections have held up so far, and many student housing developments say they are 70% preleased for the next academic year, risks include both the suspension of on-campus courses in the fall, and the trend (already happening before Covid) toward remote learning. Furthermore, some international students will not be able to return to U.S. colleges because of sweeping new changes in visas.
Another area of concern is seniors housing (defined as assisted living, independent living, memory care, and similar facilities). The outlook for seniors housing is clouded by the nervousness of seniors about leaving their homes to move into a congregate facility. That said, operators are rapidly implementing major changes in order to maximize wellness and minimize fear, and we at RCLCO believe that there still is a strong long-term future for this type of real estate. The demographic wave of the Baby Boomers is going to create a need for more seniors housing in the decade to come.
Another type of rental housing that will be fueled by the Boomers is active adult rentals, which continue to gather momentum. Though there is uncertainty about the immediate term, the long-term future is bright for 55+ rentals, based upon the age wave.
For developers, there have been construction delays, and, some projects in the pipeline have been stopped by their lenders. Developers who already have projects under way take solace in the idea that there may be fewer completions three years from now as a result of the delays happening now. Fewer completions means less competition down the road.