With most of the country now in some stage of economic re-opening, the lockdown phase of the COVID-19 response is, at least for now, behind us. The road back to pre-pandemic normalcy is likely to be a rocky one and uncertainty abounds. Before looking ahead, let’s take a look at how stabilized properties performed in April and May while much of the country was under some form of shelter-in-place policy.

Part 1 of this look focused on net absorption changes, while Part 2 will focus on rent and concession changes. All numbers will refer to conventional properties of at least 50 units.

Nationwide Look at Stabilized Properties

Before diving into some interesting data subsets, an overall nationwide look can provide some context. Average effective rent ended May at $1,350 per unit for stabilized properties around the country. This is down 0.3% since the end of March. Stabilized net absorption in April and May was negative by almost 43,000 units compared to a positive absorption of about 50,000 units in the same period last year.

Average effective rent growth turned negative in April and May, sliding 0.3% with the average unit standing at $1,350 per month. The availability of rent concessions, and the average discount value, both rose slightly in the period. About 16% of stabilized conventional properties were offering a discount at the end of May.

Market Size

The precipitous fall in demand from a year-over-year perspective was more pronounced in the largest markets and in the smallest markets. In ALN Tier 1 markets, the 33 markets with the largest multifamily presence, more than 31,000 less units were unoccupied at the end of May that began April occupied. Taken as a percentage of conventional stabilized units in these markets, that decline was 0.4% of capacity.

In ALN Tier 4 markets, the 31 markets with the smallest multifamily presence, the net change in rented units was a loss of approximately 1,300 units. Relative to the 31,000 lost units in the large markets this may appear a minuscule change, but relative to the total number of stabilized conventional units in these areas the loss represents 0.5% of capacity. Two specific large markets stood out in the data: Cincinnati – Dayton and San Diego. In the former, the net change in rented units was a loss of 1,400. This is equal to around 1% of stabilized inventory in the area. In San Diego, the loss in net rented units was 4,100 units or 2.8% of stabilized inventory.

Regional Look

The National Apartment Association (NAA) divides the country by state into 10 regions. It was markets within NAA Regions 10, 9 and 3 respectively that were hardest hit in the last two months on the demand front.

Region 10

Region 10, constituting California and Hawaii, lost more than 12,000 rented units in April and May. This loss is 1% of stabilized capacity in this region. That this area of the country experienced the loss in demand should come as no surprise. Not only are many of these markets leisure and business travel hubs, but some of these areas were among the first to enter comprehensive COVID lockdowns as well.

San Diego has already been mentioned but two other hard-hit areas were Los Angeles – OC and San Bernardino – Riverside. In LA, a net decline in rented units of around 4,300 represented 1% of stabilized capacity. In San Bernardino – Riverside, a net loss of about 1,000 units was 0.9% of capacity.

Region 9

In Region 9, which includes Florida and the Gulf states, about 6,900 rented unit totaling 0.6% of stabilized capacity were lost. These areas are a mix of travel destinations and energy-oriented economies and, as a result, were hit almost of hard as the Pacific region. The two markets to suffer the largest declines in demand were Gulfport – Biloxi and Miami. A loss of 400 net rented units in the Gulfport – Biloxi area is not a lot of units but equals 3% of stabilized inventory there. Beyond just an airbase, much of employment there is tied to casinos, spas and a medical center – which helps explain the outsized loss there. Miami lost 1,600 net rented units in April and May which is about 2% of stabilized capacity.

Region 3

In Region 3, made up of the Great Lakes states, net absorption in the period was negative by about 7,700 units – or 0.5% of capacity. Demand fell most in Toledo where about 900 net rented units lost represented more than 3% of stabilized inventory. Not only home to multiple universities, Toledo also has a large number of manufacturing and medical jobs, two employment sectors that have been heavily impacted. Just over 1,300 net rented units were lost in Columbus, which is a little more than 1% of stabilized capacity there. Columbus has diversified beyond manufacturing, but similar to Toledo, this is a market with a large education and medical presence for employment.

Takeaways

The demand picture was worse through April and May in the largest and the smallest markets. For the large markets, this makes sense because these are high-density areas in the midst of a health pandemic with higher average rents and more prolonged lockdown responses. For the smaller areas, the decline appears to be more attributable to areas with a heavy reliance on certain hard-hit industries for employment.

Regionally, California and Hawaii, Florida and the Gulf states, and the Great Lakes region stood out in net rented unit losses. In taking a closer look at the specific markets that largely drove those results, the economic impact on travel destinations or areas with an abundance of energy, medical and manufacturing jobs is clear.

There are two possible explanations for negative absorption in stabilized properties: abundant new supply is enticing renters away from established properties or market forces are driving tenants away from maintaining or renewing leases. It seems that the past two months have seen much more of the latter.

Read Part 2 focusing on rent changes.