Multifamily Held Stable in Q2 But 'Cracks Are Appearing' for Fundamentals

Apartment vacancy rates and rents for the second quarter held “remarkably stable” amid the economic distress from the pandemic–but “cracks are indeed appearing and spreading quickly” for multifamily fundamentals, according to a new report from Moody’s Analytic’s REIS subsidiary.

National apartment vacancy rates for the quarter were unchanged at a “relatively tight” 4.8%, the report said. But effective rents nationally declined by 0.4%, which, significantly, was the first decline since the multifamily sector started its recovery from the 2008 to 2009 recession.

And the decline in rents varied sharply by market. Both asking and effective rents for San Francisco fell by 3.3%, which the report said was the largest quarterly decline since the third quarter of 2001, when the city was hit with the dotcom crash and the national shock of 9/11. 

Nationally, 41 out of 82 major apartment markets recorded declines in effective rents, compared with just seven such markets for the first quarter of 2020 and zero a year ago. 

REIS attributed the Q2 stability in multifamily fundamentals to the Payroll Protection Program, which allowed many renters who’d lost their jobs to keep paying rent, and eviction moratoriums, which prevented landlords from evicting those who had missed payments.

But both forms of relief have expired. REIS forecast a sharp rise in the national vacancy rate this year, from 4.8% at the end of Q2 to the mid-6% range, and peaking at around 7% by early to mid-2021.

REIS also forecast a “record” decline in asking and effective rents by between 3.4% and 3.9% for 2020 alone, with some markets taking much bigger hits, assuming current gloomy forecasts for the US and global economies play out. 

Moody’s Analytics is forecasting a 6.5% contraction in the economy for 2020, noting that uncertainty remains high over the shape and pace of a recovery and that COVID-19 infection rates have spiked in many southern and western states. 

Relatedly, Moody’s forecast a 30% drop in new apartment construction for the year, noting that fewer than 25,000 new apartment units came online in Q2.

“The silver lining in this relatively dark cloud,” the report said, is that the multifamily sector will likely experience less distress overall than the hospitality and office sectors, and it will weather the pandemic’s economic fallout better than any other property type, with the possible exception of warehouse and distribution facilities in the industrial sector.