With April rent checks due in less than a week, landlords are starting to hear from tenants who aren’t going to be able to pay the rent due to widespread layoffs, furloughs and shutdowns caused by the coronavirus crisis.
“We’re hearing from students who are telling us their classes have gone online and their parents want them to come home, so they want out of their lease,” says developer Mike Wampold, who owns and manages some 2,500 multifamily units in Louisiana. “We’re hearing from workers, too, who have lost their jobs.”
For nearly two weeks now, the owners of commercial strip centers have been dealing with retail and restaurant tenants forced to close and looking for a break on their monthly lease payments.
Now, landlords in the multifamily sector are bracing for a similar wave of entreaties and explanations about why the check is not in the mail.
“We know it’s coming,” Wampold says. “We just don’t know yet how big the tsunami is going to be.”
The expected downturn comes as the market’s multifamily sector, which as recently as 2016 had an average vacancy rate of just 6%, has softened considerably. In 2019, vacancy rates averaged around 9.5% and in 2020—before the pandemic—they were averaging nearly 10%, a preliminary estimate shows.
“That was the stated vacancy rate of complexes we surveyed,” says appraiser Wesley Moore of Cook, Moore and Davenport. “Rental rates, which were averaging $1.04 per square foot, have also been flat.”
A glut of new inventory in the area over the past three years is largely to blame for the higher vacancy rates and flat rental rates the market was experiencing before the crisis.
“Before all this, you had a supply problem—all the overbuilding we’ve been talking about for years,” Moore says. “Now, we have a demand problem, too.”
While the student housing subsector will suffer because so many of the new complexes developed over the past three years are near LSU, properties that house the now thousands of laid-off service sector employees will likely take an even bigger hit.
“The biggest class it’s going to affect is B and C properties,” broker Mark Segalla at Elifin Realty says. “Those tenants will feel the effect of the pause in the economy. They’re the ones that have lost jobs.”
Like their counterparts in the commercial retail sector, multifamily complex owners are trying to work with their tenants, for now at least.
“We’ve been certainly understanding and empathetic while we wait to see what kind of programs are being offered,” Wampold says. “Other than that, we’re not going to be writing off a lot of stuff right now.”
But what happens in May or June? Even if commerce resumes on a limited basis by then, no one expects the economy to bounce back to its pre-pandemic performance anytime soon, which means vacancy rates will continue to increase.
“There are going to be substantially greater economic vacancies, which means some units physically empty and others will have a body in them but they won’t be paying any rent,” Moore predicts. “Unfortunately, this is going to be very much part of the picture for at least the next year.”