Rental Market Appears Stable (Despite Covid): April 1, 2020, Market Update

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Even as the United States becomes the epicenter of the coronavirus pandemic, its rental market appears fairly stable.

In fact, the national average for rental listings shown in the chart above reveals that the market is behaving counter to what I was expecting. Nationally, the average asking price for a rental went up 0.15%, from $1,960 to $1,974. Inventory dropped 2.8%, from 722,000 to 678,000.

I was not anticipating huge movement in the country-wide numbers just yet, but seeing prices increase and inventory decline was a surprise. Given the negative economic outlook (at least for the short-term), I was expecting prices to drop as landlords focus more on covering their fixed costs rather than maximizing profit. Similarly, I suspect that fewer tenants are moving, and thus assumed listings would sit on the market longer. Neither of those things happened; the opposite did.

It seems either one of two things is occurring here: 1) Landlords have not needed to lower rent yet, or 2) lower-priced units are getting filled while higher-priced units are sitting on the market, driving the average for all listed units up.

Click here to see the full, updated dataset on inventory, asking price, and more (the password for the spreadsheet is insights).

I dug into the numbers to figure out what was really going on, and the detailed data is much more telling.

On a national level, there is a significant variance in pricing between the different types of listings. In the chart above:

• Active Listings are listings that were present in this week’s dataset (as well as the previous week’s dataset). Basically, they’ve been on the market for at least two weeks and are currently on the market.
• Delisted are listings that were present in last week’s dataset, but not in this week’s, implying those units have been filled (or taken down by the landlord for some other reason).
• New Listings are pretty self-explanatory: they are listings new to this week’s dataset.

The chart above tells us a lot. The national average for active listings is $1,980—just a hair above the national average for all listings. But the listings that were delisted this week averaged $1,764—11% below all active listings. To me, this implies what we hypothesized above is happening—less expensive units are having an easier time finding tenants, and therefore the average listing being taken off the market is lower than the average of all active listings.

The difference between new listings and active listings is even more significant. The average for new listings is just $1,405—29% below the average for active listings.

These are dramatic differences and signal a significant decrease in asking prices for rent. This is the only week we’ve conducted this analysis, so there is the possibility this is an anomaly, but the fact that new listings are nearly 30% below the national average this week should serve as a warning to real estate investors everywhere that rents may fall in the short-term.

I was curious to see if this was true across different markets, and while almost every single locale is seeing a similar pattern, some states are bearing the brunt of this shift.

The chart above shows the percent difference between previously listed units versus newly listed units.

Below is a similar chart, but it shows the difference between delisted units and newly listed units.

As you can see in both charts, New York is taking a huge hit in rental asking prices, with a nearly 47% drop from active/new and a 42% drop from delisted/new. The other states with the biggest declines seem to be states with significant coronavirus cases, areas that have strong restrictions on the economy in place, or popular tourist locations: California, Arizona, Florida, Hawaii, Washington state, Washington, D.C., and almost all of New England.

The states that have positive changes or are relatively neutral appear to mostly be in the Midwest and South: Nebraska, Mississippi, West Virginia, and Oklahoma, to name a few. While it’s great to see these states showing resilience to the current economic climate, it’s worth noting that these areas have started to experience more cases of COVID-19 in recent days, so we’ll continue to monitor how they fare in the coming weeks.

Overall, 42 states (and Washington, D.C.) saw declines when comparing active listings to new listings, and 26 states (and Washington, D.C.) saw drops over 10%.

For the spreadsheet laying out week-over-week data for active, new, and delisted properties used to create the above charts, click here (the password for the spreadsheet is insights).

Unemployment Data

If you haven’t already heard, the unemployment claims from the week ending 3/21/20 were staggering. Nearly 3.3 million Americans filed first-time unemployment claims in a single week. The previous week, 281,000 Americans filed. This is an increase of 1,068% in a single week and makes the chart below just look silly.

Last week, I posted the all-time data from the Federal Reserve website to keep last week’s rise in claims in perspective. The goal then was to show that we were not yet even close to where unemployment claims were during the financial crisis. I am going to again show this chart for some perspective, but unfortunately this provides insight in the opposite direction:

The entire history of unemployment claims is completely dwarfed by this past week’s data. The previous high was just under 700,000 for a single week. That means this past week saw a 470% increase over the worst week in history.

Now, let’s again keep this all in perspective. Yes, this number is enormous, but it’s not out of line with expectations. In fact, the major stock market indexes all rose significantly on Thursday, meaning that the markets had already priced in this huge influx of unemployment rates.

Additionally, these unemployment numbers are so out of line with historical data because we are truly in an unprecedented time. Layoffs are not occurring due to fundamental weakness in the U.S. economy. Layoffs are likely occurring almost entirely in the service industry right now, as restaurants, bars, and tourism are essentially shut down. Most of those businesses were viable just a few weeks ago (and could be again). The hope is that once economic activity resumes in full—the timing of which is anyone’s guess at this point—these jobs will all come back.

This begs the question: How many small businesses can survive a sustained disruption in revenue?

I did some digging to try to understand what type of “runway” most small businesses have, and while I was only able to find data from 2016, it was not encouraging. This research from JPMorgan Chase suggests that the average business has cash reserves for only 27 days. We’re already approaching 27 days in shutdown in many places across the country. Even if the shuttering of service businesses in your area has just begun, it’s unlikely that these establishments will be closed for less than 27 days.

As part of the recent federal stimulus package, around $350 billion was designated for small business loans. This is great news, but speed is of the essence here. The Small Business Administration will need to get loans out quickly to ensure small business don’t go under before the economy restarts and they can rehire their labor force.

I created the above chart to demonstrate how some of the variables that will impact the economy are playing out. My key takeaways are:

• April rent may be hard for many tenants. It can often take weeks to file for unemployment, and the $1,200 federal checks are not being mailed for weeks. I am expecting a cash crunch for many tenants before their April rent comes due. I’ve already offered deferments and discounts on rent to many of my tenants for April.
• Tenants (and consumers in general) may also start to see economic relief in April. If tenants were hit by the recent wave of unemployment, they will hopefully get their stimulus checks and unemployment benefits beginning in April. Money will still be tight with tenants, so make sure to work with them, but the hope is that relief will start hitting consumers’ wallets this month. Tenants will still have reduced spending power, but hopefully the various government actions will help tenants cover essential expenses.
• Unemployment benefits now last up to four months. This means that unemployed Americans will have government relief in Q2 and the beginning of Q3. Thus, tenants may experience the biggest cash crunch right now, in the period between being laid off and receiving government assistance. However, this all depends on how much assistance each tenant receives and whether it covers all essential expenses.
• The viability of long-term recovery will be seen when the economy “reopens.” If businesses can hang in there for the next few months and immediately start rehiring staff, the worst of the economic pain of the coronavirus should be behind us, and a strong recovery is likely. If, however, many businesses are forced to close their doors during the shutdowns and rehiring is slow, things could get very ugly—particularly if this happens as unemployment insurance benefits begin to run out and many Americans lack income altogether.

Consumer Sentiment

While not directly related to real estate markets, the University of Michigan released their monthly Consumer Sentiment data last week. March numbers were predictably lower, falling to 89.1 from 101 in February. Additionally, the forward-looking “expectations” part of the survey fell to 79.7 from 92.1, indicating that consumers believe that the worst economic impacts of the coronavirus are yet to come.

In order to get a better sense of sentiment specifically amongst real estate investors, we released two polls last week to gauge how BiggerPockets members intend to behave in this economic climate.

First, we asked members (who told us they own at least one property) how concerned they are about various challenges in this economic environment, on a scale from 1 to 5 (1 being not very concerned; 5 being very concerned). Their answers are below:

As you can see, the two largest concerns are about tenants: both current tenants’ abilities to pay rent and finding new tenants to fill vacancies. Personally, these are my two biggest concerns as well. As we’ve discussed above, many Americans are going to experience financial difficulties in the coming weeks. This could affect tenants’ abilities to pay rent, and although I don’t have data to support this yet, I believe that fewer people will be moving in these uncertain times.

This further supports the idea that you should work with your tenants to ensure that you don’t lose good renters simply because they’re having difficulty making ends meet for a couple of months. Hopefully all the landlords are all well-capitalized enough right now to take a short-term hit in rent collections.

The data does suggest that BiggerPockets members are fairly well-capitalized, given that most of our survey respondents listed risk of foreclosure as the least of their concerns. We’re very happy to see that this is not an immediate concern to many of our members (and hopefully isn’t a concern for non-members either).

Because I was curious, I looked to see if the responses to this question varied by the size of the respondent’s portfolio, and there did not seem to be much variance, as you can see below. The key at the bottom represents the number of units the respondent has.

Next, we wanted to see how users intend to behave in a recessionary environment. I asked the questions slightly differently for experienced users (respondents who said they have at least one property—“Active Investors”) and new investors (“Aspiring Investors”).

It seems that the vast majority of active investors intend to continue to grow their portfolio either opportunistically (67%) or aggressively (11%). Only 3% said they would sell part of their portfolio, and 1% said they would sell their entire portfolio. That is good to hear—real estate is a long-term strategy, and if you can afford to hold onto your portfolio during this uncertain time, it will likely benefit you in the long run.

When we asked aspiring investors how they plan to act in a recessionary environment, I was encouraged to see that most respondents still intend to pursue their first investment. Fifty-seven percent of respondents said they would pursue their first investment aggressively, and 19% said they would casually pursue their first investment. Only 1% said they would give up on real estate altogether, which is great to hear!

Lastly, we asked users how BiggerPockets can help, and the results were clear. Nearly 50% of respondents want data about current markets, and that is exactly what we plan to provide with BPInsights. During the current Beta program, we’re going to be producing one or two articles per week with market data, but expect that to expand in future months—you’ll see more content and more on-site tools for you to conduct your own research.

Conclusion

With each passing week, we’ll learn more about the economic implications of the coronavirus pandemic—and specifically how the real estate market will be affected. While things are still unfolding and it’s early to make predictions, a few takeaways this week are:

• National-level rental data is not yet reflecting huge changes in the market. Still, a close examination of listing types indicates that rental markets are likely to decline in coming weeks. If you’re listing a property for rent in the next couple of weeks, download the spreadsheet that corresponds to this article to see how your market has been impacted (the password for the spreadsheet is insights).
• The unemployment data is frightening, but help is coming. The government is acting to try and mitigate the impacts with small business loans, corporate assistance, and the expansion of unemployment insurance for four months. Work with tenants to try to get through the next few months, and hopefully this will all be behind us over the summer.
• Real estate investors don’t seem deterred by the uncertain economic outlook. In particular, most investors are not particularly concerned about being foreclosed on or having to sell their portfolio.

Thanks for reading this market update from BPInsights. Keep an eye on your inbox and on BiggerPockets.com/insights/articles for weekly updates, spreadsheets, and more as we continue to roll out this new offering to Pro and Premium members.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.