For a little more than one month now, COVID-19 has had the multifamily real estate industry on its heels as we seek to determine what the pandemic’s impact will be on property owners’ ability to collect rents. Many theories quickly emerged with the onset of the disease, highlighting various sectors within multifamily that would be less capable of weathering the storm. In general, there has been significant concern about low-to-moderate income tenants’ capacity to pay. After all, the working class has perhaps been the hardest hit segment of the economy during this coronavirus season: these are the individuals with jobs that pay hourly, and they are the ones most vulnerable to seeing paychecks disappear because of stay-at-home orders.
Birgo Capital’s investment thesis has long been centered on the economic resiliency of affordable housing for the workforce, and we are now observing in real-time to what extent this strategy upholds in an unforeseen, massive stoppage of activity. If it’s true that low-to-moderate income individuals would struggle uniquely to pay rent as a result of the pandemic, then we will be more dramatically impacted than other multifamily investors that focus on the Class A or Class B+ property types. If the sector of the population in the most financial pain is the sector that rents out the most affordable units, then surely they, with little cash buffer to speak of, won’t be able to afford even the most inexpensive housing options in the market.
While we believed we were susceptible to this notion to an extent, our conviction has remained that the diversity of income streams supporting the working class would prove sturdy enough to enable them to pay rent. We are halfway through April, and we have enough meaningful data at this point to reach some preliminary conclusions about the first month of collections during this public health crisis.
Today, we’re sharing the three primary insights derived from our in-depth financial analysis and why we remain encouraged that this strategy will prove itself durable.
Our analysis spans a portfolio of approximately 1,250 residential units of Class B and Class C workforce housing within Pittsburgh and surrounding markets, held in various investment vehicles. This represents all residential properties that we have owned and operated for at least 6 months. Units included in this analysis range from studios to 3-bedrooms, with the majority of them being 1-bedroom or 2-bedroom, 1-bathroom apartments. Rents across all unit types average $690 per month; the least expensive unit is rented for $390, the most expensive for $1,415, and the median for $680. The gross potential rent for these apartments in one month is $860,000 assuming 100% occupancy and zero loss to collections; in an average month, we budget total rental income of approximately $805,000 to account for 5% vacancy loss and 1.5% collections loss, and we entered the month of April at 95% occupancy.
01 Historically reliable tenants still paid rent on time
Below is rent collection data for the portfolio as of mid-month from January through April:
As you can see, for tenants that typically pay within the first half of the month, we have seen absolutely no change in the data pattern. This is a somewhat astonishing observation at first glance, but it is an accurate depiction of what we’ve seen thus far, and it gives us preliminary conclusion #1: people that historically pay rent on time are still paying rent on time.
That’s not to say that there is no impact on the collection pattern whatsoever. What we have observed is that of those tenants who historically pay late in the month (and generally incur late fees), many of them only made partial payments in March.
While the change in payment pattern isn’t clear just from looking at collections through mid-month, it becomes more apparent if we look at our balance of accounts receivable. We typically operate with approximately 250 tenants carrying a past-due balance at the middle of the month; the average balance due per delinquent tenant is usually about $725. We presently have 270 tenants with a past-due balance, and the average past-due balance has increased to $800 per tenant.
02 Historically late payers are definitely late payers today
Interestingly, this means we only have approximately 20 net tenants (or about 1.5% of our total customer base) on the delinquency report who are not typically behind on rent at this point in the month. This is a very encouraging sign to us, as it indicates that typical behavior patterns among our standard, dependable paying customers are largely unchanged. If we assume that 20 tenants who typically pay on time haven’t paid because of COVID-19, it would make sense that, all else being equal, our past due rents would have increased by about $13,800 (20 tenants x average rents of $690 per month). Since the past due amount is actually about $45,000 greater than it usually is at this point in the month, we have to look a bit deeper to find out what’s going on within the portfolio.
Further exploration reveals that tenants who were already behind on rent have fallen further behind. Of the 240 tenants who were carrying a balance in the middle of March, a typical number of them – 60 tenants, or about 25% of those previously delinquent – were caught up by the end of March, leaving us with 180 tenants who owed a balance as we began the month of April.
However, the average past due balance for those tenants increased by 20% from the end of February to the beginning of April, indicating that those tenants who were previously struggling to pay rent were now even less likely to pay. Given that evictions were halted in mid-March in conjunction with the implementation of social distancing measures statewide in Pennsylvania, this is a perfectly reasonable trend to observe. The incentive for tenants with a past due balance to quickly bring their accounts into good standing was removed, and our collections within this segment of the tenant base have struggled as a result. Thankfully, most of them are making partial payments (note that the average balance due didn’t double in one month), and we have security deposits should we eventually not be able to collect from this group.
Another interesting observation is to the extent that tenants who typically pay on time are now falling behind, it is actually within the more expensive segments of our portfolio. For units where monthly rent is above the mean in our portfolio, we are seeing greater jumps in delinquency compared to those with rents below the mean. We operate under a regional model with six distinct regions within our metro, and the two regions with the highest concentration of Class C affordable properties have actually seen some of the smallest increases in past-due rents from mid-March to mid-April.
03 Tenants residing in lower-cost apartments are not disproportionately impacted
While the above chart is somewhat disparate, it’s an early indication that provides enough information to yield a third preliminary conclusion.
This is further supported by noting that of the new tenants appearing on the delinquency report, they are generally skewed toward those with a monthly rent amount that is above the average rent amount for our portfolio. Whereas typically 25% of tenants carrying a balance at the middle of the month pay above average rent per month, in April this number is actually 32%. This leads us to believe, contrary to some popular opinion, our tenants who lease our most affordable units are not financially impacted to a greater degree than those in marginally more expensive ones. These conclusions are very preliminary, and we will continue to monitor the trends closely to refine our perspective as more data becomes available.
Birgo’s tenants are demonstrating economic resilience in the midst of universally trying times
We are encouraged that those who historically pay rent are still paying rent, and we aren’t surprised that those who historically haven’t paid rent are still not paying rent. We are also encouraged that the working-class tenants for whom we are privileged to provide shelter are demonstrating economic resiliency. Today, we are focusing our energy on continuing to maintain trust and mutual empathy with our tenants by being the most effective resource we can possibly be for them because we are truly in this together. There is a soft factor to our customers’ willingness to pay rent when times are uncertain, and we believe our team’s efforts to be an ally to them in this season will reap rewards.
COVID-19 is going to create an enduring struggle for many Americans, and we are by no means out of the woods yet. Consensus within the multifamily industry is that the worst months for rent collection are ahead of us, as extended work furloughs and sharply elevated unemployment might be here to stay for some time. In an upcoming post, we’ll discuss the composition of our tenant base in detail as we continually seek to anticipate the repercussions of the pandemic on our holdings.
For now, we are encouraged to see the vast majority of our income stream has withstood the initial shock of COVID-19, and that our thesis regarding the durability of this investment strategy remains on solid ground today, even as we brace for challenges that may lie ahead.