Where are the renters going to go will market get crushed
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votesWhere are the renters going to go will market get crushed
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Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
6y@Jay Hinrichs classic economist mistake of assuming frictionless transactions. Most people don't move between B and A's or Cs and Bs the way they model. Increasingly in America there is less and less economic mobility and markets are becoming very separate.
There almost has to be deflation in rents across the board as people stagger through this, though. And I think a lot of the REIT investment money has been in transitioning properties up the food chain, and that may be a less attractive bet. And there was nowhere for all the money to go, so real estate went from a safety play with dividends to mad growth in a low interest rate environment. Gonna be harder to model those great returns!
The magazine "Seeking Alpha" (hedge fund trade) has REITs of all types down 47% right now, so lots of these guys are coming up with new theories on the fly. Some will be right. Interestingly, industrials only down 1-2% and data center REITS up 14%....after that its carnage across the board.
84 Replies
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes6y
@Jay Hinrichs
I would tend to agree that I think A’s will take a slight hit but I think it will be more location specific. This should not be overly concerning as people in the B’s will look to move up etc and down the line
What I would be most concerned with is the C/D rentals in low values areas. I feel tenant quality will decline in these areas and the “ cash flow” on paper will turn into nightmare losses in reality and those properties are not easy to exit.
Curious as to other people’s thoughts
7e investments53 Reviews - Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes6y
@Jay Hinrichs That may be regional . In areas with a lot of jobs I dont think it will be much of an effect .
- Real Estate Agent · Sisters, OR · Member since 2014 · 1k+ posts · 1k+ votes6y
I don’t see how rents go any but down across the board. There are some inflated rents that will probably be coming down in the class As, Bs, and Cs. Personally I am ready to drop rents they have claimed over 10% a year for the past 4-5 years I think I will be giving some of that back. I still don’t quite understand why a class A would not be in as a precarious position as a B or C. Who are these people that can afford or are willing to pay all of this money every month? Why would their income not be effected? I think it is quite a bit easier to replace a class C+ B- tenant (my wheelhouse) then a class A tenant. When I did property management many times they moved after a year and the turnover expenses were more expensive.
Anyway for my class C-B I am preparing for a 30% in rent which would be pretty devastating but I am hoping and I think it is probable we will see it go flat maybe a 5-10% drop.
Good luck everybody!
- Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes6y
Originally posted by @Eric Bilderback:
I don’t see how rents go any but down across the board. There are some inflated rents that will probably be coming down in the class As, Bs, and Cs. Personally I am ready to drop rents they have claimed over 10% a year for the past 4-5 years I think I will be giving some of that back. I still don’t quite understand why a class A would not be in as a precarious position as a B or C. Who are these people that can afford or are willing to pay all of this money every month? Why would their income not be effected? I think it is quite a bit easier to replace a class C+ B- tenant (my wheelhouse) then a class A tenant. When I did property management many times they moved after a year and the turnover expenses were more expensive.
Anyway for my class C-B I am preparing for a 30% in rent which would be pretty devastating but I am hoping and I think it is probable we will see it go flat maybe a 5-10% drop.
Good luck everybody!
His point was that A class rents are going to drop.. and that then B and C renters will move into the A properties because they are nicer locations or much nicer properties or amenities .. talking MF here.. So that leaves vacancy in the lower class apartments who then need to lower rent to attract new renters.. Again that was this economist take on it and what he is telling those that pay him the big bucks to tell the future LOL
- Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes6y
@Jay Hinrichs classic economist mistake of assuming frictionless transactions. Most people don't move between B and A's or Cs and Bs the way they model. Increasingly in America there is less and less economic mobility and markets are becoming very separate.
There almost has to be deflation in rents across the board as people stagger through this, though. And I think a lot of the REIT investment money has been in transitioning properties up the food chain, and that may be a less attractive bet. And there was nowhere for all the money to go, so real estate went from a safety play with dividends to mad growth in a low interest rate environment. Gonna be harder to model those great returns!
The magazine "Seeking Alpha" (hedge fund trade) has REITs of all types down 47% right now, so lots of these guys are coming up with new theories on the fly. Some will be right. Interestingly, industrials only down 1-2% and data center REITS up 14%....after that its carnage across the board.
- Member since 2018 · 41 posts · 23 votes6y
It does seem like we're going to have very strong deflationary pressures, however it's every bit as possible that previously comfortably middle class will find themselves in a little lower class and push out the low income renters. Previous owners of large homes may be very happy to downsize and push out some of the people that aren't as able to keep current on the rents.
I think eventually you may see an increase in rents in clean safe lower income neighborhoods as people seek simplicity and less expenses.
- Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes6y
@Clinton Fisher great comment and I’m fascinated by that baby boomer downsizing. Interestingly, I think lots of baby boomers can take an absolute beating on the sale of big trophy like homes built for larger families and still be fine to trade down to the 2-3 bed 1/2 bath 1400 sf low maintenance condo they really want and need. Even if it’s a bloodbath it puts upward pressure on rents for those “starter” type homes.
and on the coasts there is very little rental inventory especially in smaller singles. NH has zero vacancy rate! Years of big building have left little inventory for the kind of downscaling they talk about. Kind of like how the price of used cars rises in a recession... - Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes6y
A little simplistic, but I wouldn’t touch anything over 2000 sf right now...wasted space for a family of 3 or 4 and just adds costs
- Rental Property Investor · Red Bank, NJ · Member since 2017 · 1k+ posts · 1k+ votes6y
@Jay Hinrichs I would disagree at this stage with the economist, at least where I am and at least for today.
1. This is a very different animal. This is a self imposed recession which does not track like any other animal. Have a read of Charlie Munger's recent interview (Warren Buffett's right hand man). Companies are not reaching out to them for cash. There is not the panic, Everyone is sitting on their hands right now.
2. This crisis has boosted the importance of good, quality housing: Wired, good utilities, neighborhood amenities- parks, services, good schools for tele-students. And that plays into 3.
3. Many A & B renters are teleworking (atleast for now). Once again landlords are presented with how very vulnerable their unsubsidized C renters are. There is no way that they magically crawl out of this mess and move into A & B markets. Of course there are plenty of C landlords who convince themselves they were B landlords- and will move accordingly (accepting subsidized tenants, etc.)
My market separates the rental classes in hundreds of dollars and vastly different localities. Landlords may adjust rents- but C renters are not coming out of this the better. You will see some mobility I am sure.
I suspect, as a commuting hub to NYC and other urban area, that we may see an influx of more young professionals from the cities. Their lockdowns are more severe and enforced. The few Zoom meetings I have had with "younger" professionals in NYC (read lower cost but very expensive apartments), demonstrate a compromised connection. The (online) schools can be great, but many are lagging compared with surrounding suburbs. And there is a definite undercurrent in these areas that they are paying far too much to far too rich landlords and it is feeding not only the politicians but also their dissatisfaction with their apartments. Some landlords are justifying this mindset by shrugging and proclaiming "FRE RENT FOR ALL!"
They are seeing and hearing all of this more and more in their Zoom meetings with co-workers and friends. They are hearing about the nice walks in town parks (still open), lack of significant, if any, lines and the more inside space and better amenities.
I, Like the economist you mentioned, thought things would shake out differently. But my recent check of rents shows that they are tracking higher where there is movement. This is of course all subject to my immediate market and it is also time sensitive.
- Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes6y
@Patrick M. I think part of his presentation was with the new construction A class MF and all the amenities.
he predicts they will have lower rent and move in specials.. then he says renters from older B Class and some C will make the move to these newer MF.. ? leaving B and C forced to lower rents.. and caps to rise and values to fall and lending to get much tighter other than agency debt.
Like you though its hard to predict even this morning states are opening back up.. are people going to up and move that have been out of work for only 30 to 45 days ? and in that time they got Stim money?
I agree with you if your renters are in the lower income brackets and in service industries and small business that may not open back up there could be some real pressure there.
As for subsidized housing its not really flipping a switch most markets only have a certain amount of vouchers.. Now maybe govmit prints a bunch more ? that's feasible. but it takes time for those renters to get in the system and get their voucher.
- Rental Property Investor · Red Bank, NJ · Member since 2017 · 1k+ posts · 1k+ votes6y
@Jay Hinrichs Yeah- I am not seeing the new MF's coming in lower. But NJ is weird because new MF's have to set aside a couple of lower income- which they vet the hell out of! and usually winds up being former A/B retiree's. I remain very surprised not to see movement in rents and the movement being up if anything.
I just get this over whelming feeling that we are all holding our breath- and the sooner they can start testing the general public the sooner we can get back to life.
- Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes6y
@Jay Hinrichs Its too early to tell. For April Im looking at 100% collection on my SFR (A class in Ca and C class in Indy) as well as the syndicated B class apartments. I have lightened the C class assets over last year so my exposure there is less. I forsee some rent collection issues depending on how long this lasts. My B and C class are in red states which will open early (a tragic and stupid decision) but will probably dampen the effect.
- Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes6y
Originally posted by @Account Closed:
@Jay Hinrichs Its too early to tell. For April Im looking at 100% collection on my SFR (A class in Ca and C class in Indy) as well as the syndicated B class apartments. I have lightened the C class assets over last year so my exposure there is less. I forsee some rent collection issues depending on how long this lasts. My B and C class are in red states which will open early (a tragic and stupid decision) but will probably dampen the effect.
the economist was talking about MF only no correlation to SFR's I can see people leaving MF and renting SFR just for social distancing.
- Member since 2019 · 1k+ posts · 1k+ votes6y
@Jay Hinrichs
I’m currently resigning great tenants for 1-2year terms @ no increase where I’m at. The “just okay” ones are getting a slight increase and 12 month renewal and the “you’re a slight pain in my colon” ones are seeing the door.
- Member since 2019 · 1k+ posts · 1k+ votes6y
@Jay Hinrichs
If A class drops price and demand for it increases prices for it will go back up. If all of a sudden C+ income gets you an A property the influx of renters to that class will just create the normal sign wave / chain of events. Decrease prices ->> Increased demand ->> upward pressure on prices. Or am I missing something?
- Indianapolis, IN · Member since 2015 · 57 posts · 4 votes6yalso C class tenants behave different than A class tenants, therefore A class management will ot put up withC class tenant issues. transition is more than just economics.
Originally posted by @Account Closed:
@Jay Hinrichs
If A class drops price and demand for it increases prices for it will go back up. If all of a sudden C+ income gets you an A property the influx of renters to that class will just create the normal sign wave / chain of events. Decrease prices ->> Increased demand ->> upward pressure on prices. Or am I missing something?
- philadelphia, PA · Member since 2017 · 52 posts · 12 votes6y
the rent may go down a bit but will across board, if you screen the same, a tenant will not move up or down based on rent alone, remember reasons for changes, some incomes may not recover so will be more demand at bottom, and even if rent deferred, payment histories still there there just may be more hard choices to make, if you cant adjust for 10% your numbers are too tight, I am looking at 4 sfh unit, mortgage $500, setting each rent at $400 at 75% occupancy still show over 100% profit, can rent for more but want long term, may rent for more for sec 8 senior, looking good now as guaranteed rent paid, all 1br homes
- Investor · Milwaukee, WI · Member since 2013 · 1k+ posts · 1k+ votes6y
Hard to say. My guess is yes, the rental market will decline. Of course if we magically return to where we were then we will be where we were, but I don't see that happening.Owning still makes a ton of sense. Rates will likely never go back to a place where renting is the better option, so this will continue to hold the rental market down. Prices could fall if rates go up, but again I don't see that happening to a degree where it causes people not to buy, just to pay less. I think the days of earning from a savings account are over and we have traded them for lower mortgage rates. I think new starts will likely fall as more stock becomes available, due to reasons explained next.
I think the higher earners are not as safe as they think, and that will probably help the rental market.
However the lower earners are all screwed so any gains from the higher peeps stepping down is going to be lost here and then some.
I think we are likely looking at a lot of doubling up in housing / moving in with relatives / roommates / etc - so that will hurt the rentals. Though the folks that rent per bedroom might do great. This is what will cause stock for owner-occupied to increase and therefore hurt new starts.
Unless we see hyperinflation where prices increase and wages do too, we will probably see rents flatten or even decrease as demand goes down.
No money means no demand - don't need to be a Pulitzer winner or possess a crystal ball to see that coming.
So the answer will be the hustle. Those with better marketing and better units will win, while those with junk units and no marketing will fail. I think this hurts a bigger operator more than it might a small guy who knows how to hustle.
For me I plan to make things worse (and better) on myself by requiring first/last/damage up front in all cases. This will decrease my renter pool significantly but that's actually the goal, believe it or not. It's how I plan to survive long-term in the hood. But I can do that, because I'm small and don't have 100/1000 units to fill. My strategy is long-term, financially stable, property preserving tenants - they are out there and I intend to go get them. I intend to offer emergency credit with respect to the last months rent I hold, so a renter can access that money if they hit a bump. I expect that service to offset the pain of paying last months up front. A bit of a hard sell, but frankly I hope it catches on. The damage deposit insurance companies that are coming around might be game changers too.
- Rental Property Investor · Beavercreek OH · Member since 2018 · 422 posts · 970 votes6y
Originally posted by @Jay Hinrichs:
So was listening to an economist today that specializes in working with REITS and other top players in the industry
he got on MF
His point was as things shake out.. A and B rents will go down and C renters will leave to live in nicer units putting pressure on lower end rentals Cap rates go up on the nicer stuff and well values drop across the board.
I wonder if we will see that in SFRs as well.. if there is competition for tenants ?? rents go down people paying 800 all of a sudden can move to a nicer home.. the 800 rent gets lowered to 600 so its not vacant.. ??
if this does come to pass I suspect landlords want to do everything they can to keep their existing tenants. ?Jay,
I'm not heavily in to the multi family space, maybe 30 doors. These are a bit harder to rent currently. On the single family front, our B properties rent in a couple of days.
Delation is a concern, but I think our Fed will continue to buy every pos toxic asset in sight. That and continued money printing to the tune of trillions and inflation can't be too far behind.
Can't create that kind of money and not expect to see too many dollars chasing too few goods and services with the result being high inflation.
Just my two cents.
Gary
- Real Estate Agent · Sisters, OR · Member since 2014 · 1k+ posts · 1k+ votes6y
Got if this can’t us into inflation nothing will. In truth we need it. We have such an over leveraged economy and so many people in debt we don’t have a choice. Unfortunately people who are being hyper responsible have a good chance of being hurt. Maybe if we get out of this mess we will start to wise up a little.
I believe it was Winston Churchill who said, “the American People can always be counted on to do the right thing after exhausting every other possibility.”
- Real Estate Agent · Sisters, OR · Member since 2014 · 1k+ posts · 1k+ votes6y
Well I’m not going to lie Jay I have a vested interest in you being wrong. Most of my tenets are working poor. Maybe I’m tricking myself but I see temporary deflation that in my opinion will hit the 1800 and above rents much more then 700 places. I also don’t think that people with steady jobs are going to want upgrade their “pads” just because they can now swing it. We are going to find out and if I did know what direction there is not a whole lot I can do about it, other then sell everything and move to Mexico. I am probably as prepared as I will ever be so lets get on with it and see where this whole thing shakes out. On the development front what do you see? Do you see prices falling below building costs? To early to tell for now but that would be extreme. In Sisters last March there were 16 pending this March there were 22 pending. I was pretty surprised to see that.
- Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes6y
Originally posted by @Eric Bilderback:
Well I’m not going to lie Jay I have a vested interest in you being wrong. Most of my tenets are working poor. Maybe I’m tricking myself but I see temporary deflation that in my opinion will hit the 1800 and above rents much more then 700 places. I also don’t think that people with steady jobs are going to want upgrade their “pads” just because they can now swing it. We are going to find out and if I did know what direction there is not a whole lot I can do about it, other then sell everything and move to Mexico. I am probably as prepared as I will ever be so lets get on with it and see where this whole thing shakes out. On the development front what do you see? Do you see prices falling below building costs? To early to tell for now but that would be extreme. In Sisters last March there were 16 pending this March there were 22 pending. I was pretty surprised to see that.
keep in mind it was not me .. I was just relaying what I listened to on a high level webinar who had an East Coast economist as the guest speaker its his thought process not mine
- Specialist · Owings Mills, MD · Member since 2017 · 485 posts · 415 votes6y
Just like in the last downturn SF homeowners who loose their homes will more than take up any slack in the rental market. Low income renters have no place to go except with relatives.
- Real Estate Agent · Sisters, OR · Member since 2014 · 1k+ posts · 1k+ votes6y
Ha! I will keep that in mind. However I still find your lack of faith in the force disturbing.
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