How will COVID-19 change the average rents?

Question

How do you think COVID-19 will change the average rents in an area? Will it be pushed down or up? By what percent? How would different property classes see the rent change? (Class A vs Class C). What would be the immediate and medium term impact?

Let's have a discussion :)

Jim K. · Answer

The only logical conclusion I can come to is that rents will go up across classes. I have two reasons for believing this:

1. COVID-19 has made a lot more investors aware of what is now a very obvious risk in rentals, dealing with protracted national emergencies, that we didn't fully understand before in terms of a pandemic. As a risk, it's going to have to be offset by increased rent.

2. Due to eviction freezes and court stoppages in our area, a lot of us landlords have become a lot more aware that the rental climate is changing. That government is perfectly willing to pander to our tenants for votes and screw us. This is another general risk for us. The risk is, again, going to have to be offset by increased rent.

Pat L. · Answer

We're raising rents & are still very actively looking & buying if it meets our criteria. None of our tenants have missed work or a payment, it's amazing how many find work when they need to. In fact one essential worker who always worked from home took on yet another JOB she can do from her home office.

We have seen one local duplex that's been FOR RENT for a few months, yet others (during this pandemic) offered @ $1100-$1400/month have been snapped up. I guess it will depend on when evictions are allowed & then maybe we will see a flurry of 'for rent' signs outside some of the local complexes.

In all my years the operating costs of a property have NEVER decreased & much higher property taxes are inevitable so unless you're in it to lose money, or bought into strict rent controlled housing, rents will have to rise.

Taylor L. · Answer

My issue with mainstream real estate journalism was laid bare in the first sentence: "Even some hot markets have shown signs of softening" - duh! The hot coastal markets are the first ones to soften, actual real estate investors have known that for years. Mainstream investing journalism is so severely detached from actual real estate investors.

Our collections have held up, and we're still able to get qualified tenants. Nobody knows what the rest of the year will bring, however, so we are being very guarded.

Patrick M. · Answer

Interesting article on Luxury REIT's in todays WSJ. While they may be niche- the message that white collar tenants are working and paying rent plays across other markets.

"Even some hot markets have shown signs of softening. Asking rents in luxury buildings in San Francisco were down on an annual basis in April for the first time since 2010, according to a report from property-data firm Yardi. Los Angeles and Orlando, Fla., also experienced declines in asking rent for this same class of apartments.

Despite the rosier-than-expected performance numbers by landlords in the first months of the pandemic, apartment REIT stock prices have lost 23% in 2020, compared with the 8% decline for the S&P 500 stock index, including reinvested dividends.

Camden Property Trust is offering renewals with 0% increases, Chief Executive Ric Campo said. That is down from the 4% or 5% increases the Houston-based landlord was charging in recent years, but still not bad during tough economic times.

Mr. Campo said that if a prolonged downturn occurs, it could lead to a steep drop in construction activity, increasing demand for existing apartments once the economy begins to improve.

“What could happen is that rents could decline some, but they won’t fall to the basement,” he said."

Ultimately we will have to see what happens when the government stops pumping cash into peoples' pockets and the market is once again allowed access to the courts.

Russell Holmes · Answer

I feel that A-class luxury apartments will see the biggest declines.  That's a premium product for renters who feel they can afford the lifestyle and don't wish to buy. It is not a necessity and it involves communal leisure and other common areas that previously weren't noticed as a risky.  I feel that single family homes and small multis which provide tenants some private yard space, parking close to their front door, and other 'social distance' criteria will be in more demand.  Likewise, many employees that used to be tied to an office and as such aimed to live within a certain commute are now being told they can work remotely either indefinitely or at least through year's end.  This should make suburbs more appealing to city workers than they once were.  When they see that similar rent money can get a larger house with space for a home office, private yard, etc, it's hard to justify that luxury downtown apartment when the office isn't a daily need or even open for business.

Some of these trends could be more temporary since renters could, more easily than homeowners, move out of a city for a one year lease and back in the next year.

To what percentage this changes one asset class to another is extremely difficult to predict and would vary by market and asset class.  But I think we are seeing some fundamental changes to human behavior, employment, living, and personal space that haven't been seen in any of our lifetimes and will become part of how we analyze property and future risk.   This could shift residential and commercial markets in a lasting way, but I don't think it'll flip anything on it's head overnight.  It won't be things tanking across the board, but luxury apartments may see no increases or even declines in rent while single family homes, small multis, and more affordable apartments see more stability or increases in rent.

Mike Dymski · Answer

Most apartment communities across the country have implemented the following (will vary by location):

• Paused repositioning and rent increases
• Halted rent raises on renewals
• Waived application and admin fees for prospective residents
• Offered payment plans for COVID-impacted residents
• Increased reserves
• Focused on occupancy (vs pushing rents)

If economic occupancy declines, the buttocks-clenching will increase.

Greg M. · Answer

As mentioned by others, the fact that the government has put more risk on landlords will absolutely result in rising rents to offset this. The fact that rents don't need to be paid because there is a national emergency is a new risk we all will have to factor in.

Rent changes are likely going to be area specific. Places with reasonable no eviction policies and fair repayment plans will have lower rent increases. Places were there was talk that the rent should be 100% forgiven or a forced reduction will have a much higher rent increase.

I believe there is going to be a demand shift in larger and nicer homes as more people transition from working in an office to working from home. Since people will be home much more, they'll be looking for nicer places with more space for a home office.

Nathan Gesner · Answer

I believe the rental market will see a 1.72% deline, starting in the east and migrating west by fall of 2021.

Whatever. Nobody knows the future. We can only make educated wags (wild-ass guesses) based on past performance, but there are always anomalies to surprise us. Many of us thought there would be a housing crisis due to the easy lending in the early 2000s, but only a very, very small percentage of people believed it strongly enough to invest in the prediction. Likewise, many people are predicting what will happen in the next 1-5 years but it's rare that you'll find anyone so certain that they're willing to put money on the line.

People invest in things they truly believe in. Watch Warren Buffett and see what he does with his money. Right now, he seems to be holding onto it.

Patrick M. · Answer

@Russell Holmes I agree. Wealthy individuals sacrifice a lot for the convenience, entertainment and culture of cities... So what happens when all that goes away? Well, then you are essentially confined to an urban nowhere land and if you have kids you have just imprisoned them for more hours out of the day.

How will COVID-19 change the average rents?

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