At the end of 2020, apartment owners — particularly those in the mid-market segment of the industry — concluded one of the worst revenue years in memory as a result of the Covid-19 pandemic. Occupancy fell, especially in dense urban areas also affected by civil unrest, and collection rates fell due to unemployment, lack of additional stimulus in the fourth quarter and eviction moratoriums. A survey conducted in the Chicago area in September 2020 and again at year-end measuring collection rates revealed plummeting rates of collection.
The economic impact of the pandemic is expected to persist in multifamily for approximately 18 months, from the time of data collection and occupancy rates flattening then beginning to increase. Although data is reliable only with quantity and passage of time, those of us talking with multifamily property owners every day can already forecast what the next data set will tell us: We hit the bottom in January 2021.
Did We Really Hit Bottom?
Brokers tend to see the world through rose-colored optimistic lenses. In December, I forecast the 2021 multifamily market. I alluded to three major areas where change would occur that would signify a corner was turned: the oval office, the vaccine and financing.
The 2020 campaign season, election and transition resulted in a period of political impotence for addressing the issues of vaccine roll-out and stimulus approval. With political stability in the Oval Office, public perception is that vaccine roll-out and stimulus are both back on track — and perception is everything for apartment renters. What people perceive guides their decisions on where and how they live, meaning where and what they rent. Covid-19 restrictions are loosening for major metropolitan areas across the country, and some form of additional stimulus is expected to soon pass that will assist renters, and thus revenue for apartment owners. The Oval Office is an important factor in multifamily occupancy and collection rates not because of who won, but because someone won. Regardless of your political opinions, the fact that the election is finally behind us solved one of the major components for multifamily recovery.
The vaccine is another inflection point for the multifamily industry. Once enough of the population has either been vaccinated or knows with certainty when they will be vaccinated, all the “normal” parts of our lives can continue. The result is an economic recovery that will propel us to levels of higher productivity and GDP (most likely exceeding pre-pandemic levels within a few years), meaning sharp reductions in unemployment, meaning people will be able to return to jobs, earn money and pay rent. Although the survey results at the end of 2021 for Chicagoland were alarming, I know through conversations with apartment building owners that January was an unusually high activity month for leasing and the trend has continued into February. The takeaway? Public perception that we have hit bottom is resulting in the reality that we hit bottom — and the major component driving this is the vaccine.
The third and final component needed to shift our industry into full recovery mode is financing. Banks are the most conservative players in our industry and the most sensitive to instability or volatility in the markets. Until the changes I describe above relative to the Oval Office and vaccine are proven out with data, lenders will not return to more predictable financing. We can expect to have data corroborating the shifts by the end of Q1 2021. By the end of Q2 2021, I predict bankers will return to pre-pandemic lending methods. Until the beginning of Q3 2021, the third major component needed for being fully back on track — financing — will be missing from the equation.
Still Not Out Of The Woods
Hitting the bottom and being in economic recovery are two different things. We are not out of the woods yet. Negative impacts from the pandemic are still being felt by apartment owners and will continue throughout the commercial real estate industry for years to come. In my December article, I predicted that lenders would be the last to embrace optimism that the economy is improving, and that economic recovery would not be in full swing until the third quarter of 2021. We are on track to achieving this.
And the good news? The data at the end of the first quarter will corroborate that we indeed hit the bottom in January, meaning we turned a corner and are now headed in the right direction to get to our destination.
multifamily collection and occupancy