Rental Asking Prices See Slight Increase: April 22, 2020, Market Update

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Note: Our rental market updates are analyzed using data we license from a company that aggregates information about active rental listings. In the near future, we will be adding an entirely new dataset to our market updates that will include property prices, foreclosure data, vacancies, and more, so stay tuned! 

Here is this week’s spreadsheet with pricing and inventory data for every city in the country. The password is insights. 

Continuing a trend that began in February, the asking price for rents around the country increased slightly this week, from $1,978 to $1,981. Inventories remained mostly flat, increasing 0.3%, from 677,000 to 679,000. 

If you’ve been following BPInsights for the last few weeks, you know that I have a hypothesis about why prices continue to inch up. As a reminder, here it is: 

National listing prices are not increasing because landlords are raising rents. Rather, less expensive apartments are getting filled, while higher priced apartments sit on the market, driving the average up. 

To back up this hypothesis with data, I am looking closely at three different types of listing each week to help make sense of the rental numbers: 

• Active Listings (AL): listings that have been on the market for more than one week
• New Listings (NL): newly posted listings in a given week
• Deactivated Listings (DL): listings that have been removed from the market in a given week—we are using this as a proxy for “market rent” 

Breaking down these three listing types shows a more interesting picture of what is happening with rental prices in the U.S. 

As you can see in the graph above, active listings are creeping up very slightly—and are basically flat. 

I am surprised to see that the average price of new listings jumped back up this week, from $1,743 to $1,802. In fact, I expected the price of new listings to drop further, which I will discuss more below. 

Lastly, deactivated listings continue to trend downward for the fourth straight week. To me, this dataset gives the best explanation for what is happening in the U.S. rental market. The price of listings coming off the market (finding tenants) is going down. Active listings and new listings show what landlords are hoping to get for their units, whereas deactivated listings show what units are actually getting filled. 

The discrepancies between active listings, new listings, and deactivated listings suggest that landlords are not appropriately pricing their units. Landlords and property managers are listing units that are, on average, about 3.5% more expensive than the average property that is managing to secure new tenants. 

While the declines are not overly dramatic so far, I do expect them to continue. On a national level, deactivated listings dropped 33% week-over-week and are down 62% over the last four weeks. 

In the table below, I analyzed how many deactivated listings there were in some of the top U.S. cities from January (before COVID-19 was a real concern in the U.S.) to now. 

These numbers are stunning. New York and Washington, D.C. have seen drops of over 85%, suggesting far fewer leases are being signed. Even Texas, where markets are faring better than most major metros, has still seen a decline of over 33%. In normal times, that would appear catastrophic. 

But these are not normal times, and these numbers don’t necessarily foreshadow long-lasting pain in these rental markets. Demand is likely at an all-time low in the rental market, which makes sense. Who would realistically want to move right now?

All of this suggests that landlords looking to fill vacant units right now should seriously consider discounting their properties to avoid extended vacancy. There is likely not enough demand to support the prices that were feasible a few months ago. The declining price point of deactivated listings supports my theory and suggests that the price renters are willing to pay is going down. 

Unfortunately, it seems like the expectations of landlords and property managers have not caught up with reality. The graph below shows that the price of active listings is now about 15% higher than deactivated listings. New listings are a bit closer to market rent but are still 5% overpriced. 

Of course, this all varies significantly by market, so make sure to download this week’s spreadsheet (again, the password is insights) to see what is happening in your market. However, if you have a property sitting on the market right now, you might want to consider discounting it 5-15% to better meet the types of properties that are finding tenants right now. 

It’s not possible to show data for every city, but we can show how different states are doing in terms of the discrepancy in price between listings.

As you see, Louisiana and New Hampshire seem to be off target by the greatest margin. States on the left side of the above graph are likely going to have to discount their active listings to find tenants right now. 

Conversely, Wyoming, Connecticut, and a few other states are experiencing a curious trend in the opposite direction—the price of deactivated listings is higher than active listings. 

While I am not exactly sure how to explain this, my theory is that the luxury markets in those cities are propping up their data. A lot has been made in the media recently about how the rich are retreating to rural areas for quarantine, which I believe could be holding up prices, but that is just speculation on my part. I will try to dig into that next week! 

I did attempt to shed some light on another storyline that has been discussed in real estate circles—that COVID-19 will reverse the trend of urbanization and that there will be a resurgence in suburban and rural markets. I think this theory makes some sense logically, but I tend to believe these predictions are often overblown. (How many friends of yours have declared they’re “moving to Canada” during a crisis, but then carry on as usual after a few days?)

Still, the bit of data I could find does suggest there is some merit to this claim. The table below shows that over the last 12 weeks, the average price of deactivated listings has remained perfectly flat (likely an anomaly that it’s the exact same number) for houses, while the prices of apartments have dropped 10%. 

It’s not perfect data, but it does suggest that at least for now, demand for houses that have their own space and make it easier to social distance are in higher demand than apartments. 

CBRE Predicts Q4 Rebound

Commercial broker CBRE predicts multifamily markets will begin to see light at the end of the tunnel by the fourth quarter of 2020. But first they will experience increased vacancy and declining rents for at least the next two months. That will bottom out in Q3 of 2020 before a recovery begins in Q4.

The firm also predicts vacancies will hit 6.3% in Q3 and that rents will drop 6.7%. The firm doesn’t expect rents to begin to recover until Q1 of 2021. It also points out that some tenants’ inability to ultimately pay deferred rent is a new factor that owners/landlords will have to take into account.

Commercial Real Estate Update

The Financial Times has forecasted several potential challenges that real estate markets may face once the worst of the COVID-19 outbreak has passed:

• Retail tenants, who were already hurting because of ecommerce, could see even greater struggles, as consumers have gotten used to depending on online retailers even more than before.
• Corporate tenants may reduce their space requirements if they decide to replace laid off workers with software replacements and/or automation.
• Other businesses could discover that work-from-home arrangements are more efficient and productive and choose to reduce, or even eliminate, their space requirements.
• Regulatory requirements and zoning laws could change in response to COVID-19’s disproportionate impact on poor communities.
• Deflation is likely, which may result in empty rental space as “zombie firms” (those that have unsustainable debt servicing costs) go out of business, higher borrowing costs, and losses on mortgage debt underwritten by financial assets.

Retail Pain

Mandatory business closings and stay-at-home orders triggered a record-setting 8.7% decline in U.S. retail sales in March. That’s the biggest drop since the government started tracking retail performance in 1992. 

Not surprisingly, online retailers, grocery stores, and pharmacies experienced increases, but the decrease in most other categories was far greater.

Compared to Q4, 2019, it’s expected that overall consumer spending will drop as much as 41% for Q2 2020.

COVID Rider Appears in Contracts

Residential real estate agents have started including a contract rider to address COVID-19-related scenarios. Standard force majeure clauses usually cover only natural disasters and don’t include pandemics. The new language specifies pandemic or coronavirus as valid reasons to cancel a contract.

The rider enables buyers to ask for more time to complete requirements like finalizing lending or inspections. For sellers, it can facilitate contract extensions. Some experts point out that the new provision will also help to address market fluctuations and values that change because of the pandemic.

Some Mortgage Appraisals Can Be Postponed

The Board of Governors of the Federal Reserve, Federal Deposit Insurance Corp. (FDIC), and Office of the Comptroller of the Currency (OCC) announced that banks will be able to delay appraisals for as many as 120 days after a mortgage closes. The change, which will last through the end of this year, is intended to expedite access to credit during the COVID-19 emergency.

The rule only applies to banks regulated by the Fed, FDIC, and OCC and to loans that those banks keep in their portfolios. If loans are sold to or guaranteed by the Federal Housing Administration (FHA), Department of Housing and Urban Development (HUD), Department of Veterans Affairs (VA), Fannie Mae, or Freddie Mac, they will still require standard appraisals before closing. 

The change eliminates appraisals for “residential and commercial restate estate secured transactions,” but does not apply to “transactions for acquisition, development, and construction of real estate.” 

The National Credit Union Association is considering a similar rule change.

Advice to Protect Your Business

With so much uncertainty in real estate markets, there are steps you can take to make sure you’re protected for whatever lies ahead. Although these suggestions were intended for commercial situations, they apply just as well to residential investors/owners.

• Keep detailed records of all pandemic-related issues, like complete or partial loss of use by tenants or actual on-site exposure to COVID-19. Include dates, duration, cause of closure, dates of discover of issues, and remedial actions taken.
• In case of certain tenant actions, be aware of whether your lease includes provisions to delay or excuse performance and/or payment. These could include force majeure, interruption of service, or denied access.
• If you carry debt service, make sure you are familiar with and fully understand the terms in your loan documents. Don’t hesitate to discuss options with your lender.

Conclusion

While the recent data suggests some short-term challenges, I don’t believe they will last. As soon as stay-at-home restrictions are lifted, I expect that a great deal of the lost demand will recover relatively quickly. My best guess is that demand for rental units will mostly return to pre-COVID levels in the months following restriction lifts, but demand and prices won’t recover fully for a year. 

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