Jobs Data Suggests Increasing Risk in the Multifamily Real Estate Sector

The multifamily sector in the U.S. is often considered the safest real estate investment. Even in recessions, most households strive to pay the rent and keep a roof over their heads. While the multifamily sector has continued to perform in the current health and economic crisis, there is recent evidence of systemic stress.

Employment is the critical driver of multifamily demand and, for most households, the primary source of rental payments. With the onset of the pandemic and lockdowns across the country, over 22 million jobs were lost by no fault of the work force. Significant gains have been made since April, with 11.4 million jobs recovered. However, there is still a long way to go and recent data indicates that job recovery has slowed.

The latest Bureau of Labor Statistics report indicates that September job growth fell to 661,000 from almost 1.5 million in August and 1.8 million in July. Per the report, “In September, 19.4 million workers reported that they had been unable to work because their employer closed or lost business due to the pandemic; that is, they did not work at all or worked fewer hours at some point in the last 4 weeks.”    According to Indeed, job postings for the week of September 18 were 18% below the same period in 2019. And working against the positive trend are new layoffs. There were 837,000 initial unemployment insurance claims for the week ended September 26.

When the crisis hit, Congress was quick to pass a number of stimulus programs, including providing unemployed workers an additional safety net of $600 per week. However, those payments expired at the end of July, causing national personal income to decline by 2.7%.  Congress has not passed another stimulus package. The math is straightforward: Despite their best efforts, a prolonged recession will make it increasingly difficult for out-of-work tenants to pay their rent on time.

So far, rent collections have held up well, but the foundations may be showing some cracks. The National Multifamily Housing Council’s (“NMHC’s”) Rent Tracker for the week ended September 27 indicated that 92.2% of more than the 11 million units in the survey had paid all or partial September rent (no statistics are available on partial payments). That is down from 93.7% in September 2019, prior to the pandemic. While the 1.5% reduction appears small, the NMHC indicates that it represents 170,000 additional households unable to make rent payments by the third week of the month. Moreover, the percentage of renters meeting rent obligations by the end of the month trended downward between June and August.

Another indicator of weakness is revealed in the U.S. Census Bureau’s weekly Household Pulse data, a new survey that measures how American lives have been impacted by the pandemic. The rental housing sections of the survey asked tenants whether they were caught up on their rent and sought their confidence level in their ability to pay the following month’s rent. Based on the survey taken between August 19 and 31, slightly more than 15% of tenants nationally were not caught up on rent, and 27% had either “no” confidence or “slight” confidence that they would be able to pay September rent.

While that data is discouraging, there are several demographic groups whose inability to pay rent and their corresponding negative outlook are well above the national average. Not surprisingly, these groups include those who have lost their jobs, households with larger families, and households with less education. Unexpectedly, the age group of 40 to 54—aka Gen X, which is sandwiched between baby boomers and millennials—is struggling with rent payments. In each of these groups, more than one in five surveyed are not caught up on rent, and a third are concerned about paying rent going forward. In the case of households with less than a high school degree, almost half have a negative outlook.

These grim statistics suggest that as we head into the fall and winter months, without a significant recovery in employment or the safety net of further government stimulus, many apartment renters will continue to struggle as they deplete savings or pile on credit card debt to cover their housing costs. Given this risk, the question for multifamily investors is whether the sector will continue to be a relative safe harbor for their capital. Multifamily owners should continue to proactively work with tenants in preparation for further requests for rent relief. Not since the Great Recession has close monitoring of property cash flow and debt service coverage ratios been so critical. The longer it takes our nation to restore its health and its jobs, the more risky the multifamily market could become.