The average rental arrears is about 2.9 months’ rent and to make up for those costs the new rent would need to be at least 25% higher.
Institutional-grade multifamily product will likely emerge from the looming end of eviction and foreclosure moratoria relatively unscathed, but Class C properties in less recovered markets are staring down greater exposure.
That will leave some landlords in the precarious position of deciding whether to evict (and potentially draw big rent increases with new tenants) while assessing the risk of foregone rental arrears, according to a new report from Cushman & Wakefield.
“On the one hand, this means that owners will have renewed freedom of action,” writes C&W’s Kristina Garcia in the report. “On the other, were there to be a significant increase in turnover in the market as a result of increased evictions, occupancies would fall, likely resulting in a decline in rents.”
New lease rates among Class C properties were on average 5.9 percentage points higher in June 2021 than in the year prior, according to RealPage data. And new lease trade-out premiums are highest in low and moderate vacancy markets like Phoenix, Atlanta, Portland, Seattle and Baltimore. San Jose and San Francisco were the only exceptions, standing out as markets where increases in Class C rents on renewal were higher than on new leases.
But there’s a catch, C&W cautions: “in pursuing these new rents, landlords will likely find it more difficult to recoup rent in arrears that, with additional patience, can be obtained through state and local ERA programs,” the report notes. “In assessing the tradeoff here, landlords should pay attention to the exact implementations of ERA programs in their jurisdictions, particularly to what extent they can negotiate short-term lease extensions while still participating.”
The average rental arrears is about 2.9 months’ rent, according to Moody’s Analytics, and for a new year lease to make up for the cost of those arrears, the new rent would need to be at least 25% higher.
Investors willing to work through these issues may be successful in locating properties with significant arrears, and “in most cases, patience will be the best course,” the report says.
But “more broadly, the end of the eviction and foreclosure moratoria will have little impact on the wide-ranging factors driving returns to multifamily investors. The multifamily sector has several strong years of fundamentals ahead of it,” Garcia writes. “This is particularly true for the lower-to-middle end of the market given strong demographic forces and ongoing shortages in housing in this segment.”
Multifamily investment volume increased by 34% quarter-over-quarter in Q2 to reach $52.7 billion, according to CBRE, and prices are on an upswing, rising 12% in the 12 months ending in June. And according to John Chang, senior vice president and director of research services at Marcus & Millichap, buyers fearful of rising inflation are aggressively pushing up apartment pricing.
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