Even in normal times, American investors get a little nervous every four years. Uncertainties about election outcomes become uncertainties about the investment landscape — and that reality is more pressing this year because of the crisis economy we’ve been living in (or trying to stay socially distant from) for the past eleven months.
While impeachment, Gamestop, and Bitcoin have definitely stolen a few news cycles from stimulus, passing the next round is now a top Congressional priority, and Senate Majority Leader Chuck Schumer has signaled that March 14 is Washington’s internal due date. For the next few weeks, the big question isn’t whether stimulus is coming, but how much and where it’s going.
Let’s break down the possibilities, and what the implications might be for real estate investors.
What’s in the bill?
In January, the Biden administration proposed a $1.9 trillion spending package — close on the heels of a $900 billion stimulus bill in December, and over $3 trillion in relief-related expenditures throughout 2020. The proposal includes $1,400 checks for eligible American adults, $20 billion to accelerate vaccine logistics, expanded unemployment benefits, health insurance premium subsidies, and a 15% food stamp increase.
More relevant for real estate investors are a number of housing subsidies and protections, including an additional $25 billion in rental assistance for low-to-mid-income families (that’s on top of $25 billion in the December stimulus), $5 billion for utility bill subsidies, and an extension on eviction moratoriums (currently slated for expiration at the end of March) until September 30th.
So, what about Congress?
In most respects, the stimulus proposal is a continuation of last year’s stimulus efforts — but, many of those efforts were scaled back from initial proposals through the political process.
The vote math is different now post-election cycle. House Democrats have started drawing up the legislation, and there seems to be enough momentum to get the bill through the House. However, there are still complexities that are present in Congressional approvals, and it’s looking like the powers that be will have to choose between big and bipartisan. So far, it looks like they’ll choose ‘big.’ Generally speaking, though, the show will continue until everyone’s happy, which could take a while.
What’s the bottom line? Look to what happened in December. Stimulus will almost certainly pass eventually, because as long as the pandemic continues, lawmakers on both sides of the aisle face constituent pressure for relief. The bill has already, and will continue to, shrink on its journey between its drafting and its enactment, but some form of stimulus is virtually assured.
How will that impact multifamily?
The stimulus provisions aimed at housing — like rent relief, utility support, and eviction moratoriums — will have predictable effects. For most of the multifamily sector, renters could have fared worse through 2020. Industry wide, rent payments are down about 2% from this time last year, and fell as a whole through 2020, but not to catastrophic levels. Some portfolios actually performed better during the pandemic as renters prioritized housing stability in otherwise uncertain times. Direct rent assistance payments should improve those numbers, padding cash flows when stimulus materializes — but challenges remain. Let’s break the bill down by category.
$25 billion sounds like a large number, but there’s two important caveats. We don’t know when stimulus will take effect and it’s hard to say how much it will help. In some regions, close to 20% of households are behind on rent, and — as of late January — total uncollected rent nationwide was around $57 billion. A $25 billion rent relief bill will certainly help some delinquent accounts, but it totals less than half of current outstanding rent, which will only continue to rise for the immediate future. The timeline for payment normalization will ultimately be contingent on COVID-19 suppression efforts; rent relief can be a helpful stopgap, but we’re looking to widespread vaccine rollout (and, eventually, health in the actual economy) before the country can declare victory.
It’s worth noting that in the interim, some rental property owners need rent stimulus as badly as tenants. The expense side of the balance sheet has only increased this year due to COVID-19 mitigation requirements, and constant expenses like mortgage payments, taxes, utility bills, and maintenance fees haven’t gone away for landlords just because there’s a pandemic. In fact, labor and materials costs for maintenance have generally increased due to supply shortfalls as people around the country have invested into home improvements at unprecedented rates. For landlords, paying for those steady or elevated expenses on a building with 94% occupancy and sub-88% collection on occupied units may not be tenable without rent relief — especially for smaller, non-corporate property owners (mom and pop landlords).
So, without rent relief, multifamily investors without an emergency buffer could suffer with a drop in rental income. Insufficient rent relief, coupled with eviction moratoriums, could worsen the problem.
The stimulus package proposes and extension of the moratorium through September 30th. A months-long eviction ban could incentivize tenants to prioritize expenses other than rent, expanding delinquency and compromising property owners’ cash flows. As property owners who have seen very strong collections despite eviction moratoriums in place for nearly one year, Birgo knows that this is not an insurmountable challenge. Vertical integration -- managing the properties that we invest in -- has been key for Birgo, as we take a very relational approach to property management. Regardless, eviction bans are a challenge nonetheless, and they needs to be acknowledged as such.
What about direct payments?
$1,400 payouts are popular, but only about 35% of stimulus checks cut so far have been spent to service outstanding debts. A larger proportion of recipients have been inclined to invest, or otherwise save their checks. Reading between the lines, the eviction moratorium — and credit relief, student loan pauses, etc. — could be relevant here. If eviction is off the table, some stimulus recipients may opt to defer non-imminent expenses and deploy their liquidity to meet other financial goals.
A similar interpretation is that, since as of December, average back rent hovered around $6,000, already defaulted renters saw stimulus checks as a drop in the bucket and opted to spend them elsewhere. Given our robust analysis of payment data, we know that those who were delinquent pre-COVID are even more delinquent now -- but, thankfully, we also know that the vast, vast majority of tenants who historically pay on time continued to pay on time. We have to assume that direct payments contributed to this, and as the labor market continues to struggle, further direct payments will be very well received by the multifamily industry.
Where does this leave us?
That depends on where in the multifamily spectrum your investments are positioned.
First, nationwide averages may not be effective proxies for all real estate investments. National REITs invested in expensive coastal properties were hit much harder by value erosion during the pandemic than smaller, private equity real estate firms targeting more affordable markets. When times are bad, renters will generally flee expensive properties and flock to affordable ones. Resistance to value erosion in affordable markets may position some multifamily funds as safe havens in a recessionary environment.
Second, stimulus is not one-size-fits-all. Rent relief disbursement scales regionally, with median income. Direct payments, on the other hand, do not. The impact of a $1,400 stimulus check is relative between markets, which means relief will carry outsized implications for funds comprising lower-rent units — $1,400 goes a far cry further in Milwaukee than in Miami.
The multifamily space, especially on the more affordable end of the cost spectrum, has fared better during the pandemic than most other investment sectors. Housing demand is relatively inelastic, and rent payments have been much more stable over the past year than virtually any analyst projected early in the pandemic. For the vast majority of apartment investors, the picture in the rear view mirror is a pretty one.
However, it is the end of stimulus that real estate investors need to watch out for. There’s no question that the relative durability of rent payments over the past few quarters has been made possible in part by stimulus programs, and there’s no guarantee that stimulus will continue to arrive. If those programs end before we’re out of the woods, real estate investors could see rising delinquency.
Supposing Washington continues to enact policy that keeps a lid on delinquency, real estate investors could yet face other problems. The federal government has spent a historic amount of cash this year, and deficit spending invites inflation, which could place upwards pressure on capital costs. Of course, that’s a two-edged sword, as asset values and rental income should rise in that scenario as well.
We’ll end on a positive note: due to persistent demand for affordable housing, multifamily will probably exit the recessionary environment sooner than some other sectors. For investors who held out over the past year, that could mean rising property values when it’s time to exit. Stimulus can be a helpful interim measure, but once the economy comes roaring back to life, we’ll expect to see the longer-term trends associated with COVID-19 -- like working from home, and migrating to lower cost metros -- to accelerate demand for Heartland multifamily into the future.
If you’re interested in further thoughts about investment performance in 2021, or would like to discuss an investment with Birgo, schedule a call with us today.