COVID-19 has introduced a lot of economic uncertainty into the US and global economies. In a matter of weeks, the United States has gone from record low unemployment, strong job increases and rising wage growth to some economists declaring that a recession has already begun. The duration of the largely economy-wide pause, the eventual medical fallout and both government and private action will all effect the relative severity of the economic consequences of the global pandemic.

While there continue to be many unknowns, one aspect that is not in dispute is that certain subsets of the economy like travel, hospitality and service jobs will be hit hard and are already feeling the effects of social distancing and shelter-in-place policies. So which markets have an outsized presence of these jobs, and what was the state of the multifamily industry in some of these areas as current events began to unfold? To answer these questions, US Census Bureau and ALN data will be used.

Metro Areas with High Industry Concentration

The Census Bureau tracks employments for two especially relevant categories, retail trade as well as a category that includes entertainment, food service, accommodation and recreation employment. The top 10 metropolitan areas for combined employment for those two categories on a percentage basis are listed below.

1. Las Vegas-Henderson-Paradise, NV – 38%
2. Atlantic City-Hammonton, NJ – 36%
3. Myrtle Beach-Conway-North Myrtle Beach, SC-NC – 34%
4. Punta Gorda, FL – 33%
5. Kahului-Wailuku-Lahaina, HI – 32%
6. Lake Havasu City-Kingman, AZ – 32%
7. Homosassa Springs, FL – 31%
8. Flagstaff, AZ – 30%
9. Gulfport-Biloxi-Pascagoula, MS – 29%
10. Hilton Head Island-Bluffton-Beaufort, SC – 29%

Recent Multifamily Performance – Larger Metros

Starting with areas with a larger multifamily presence, the Las Vegas, Atlantic City and Homosassa Springs metro areas have performed well in the last annual period ending at the close of February. Both Atlantic City and Las Vegas finished February with average occupancy above the national average, at 94% and 93% respectively. Homosassa Springs finished at just over 91%.

Additionally, demand was strong in Atlantic City and Homosassa Springs over the last year. Net absorption for Atlantic City topped 6,500 units in a period that saw the introduction of about 4,200 new units. Homosassa Springs nearly managed to outpace new supply with newly rented units, with 7,300 newly rented units and approximately 7,400 new units. Even so, this demand was more than enough to maintain average occupancy. Las Vegas demand was not robust in the last 12 months. Less than 400 units were absorbed and about 1,700 new units were added during the same timeframe.

From a rent perspective, all three of these markets met or exceeded the national average for the last 12 months. Atlantic City average rent appreciation matched the national average at 3.4% bringing the average unit to about $1,370 per month. Homosassa Springs had an even better year, with annual average effective rent growth of 4.3%. The Las Vegas area led the way with an annual gain of 6.4%. That aggressiveness with rents may have something to do with the tepid demand and resulting average occupancy decline.

Recent Multifamily Performance – Smaller Metros

Two of the smaller metro areas, Myrtle Beach and Punta Gorda, had a relatively high volume of new supply within the last year and average occupancy declined accordingly. In Myrtle Beach, about 1,500 new units were delivered and about 900 net units were newly rented. Average occupancy declined 4.5% to 83%. In Punta Gorda, net absorption totaled about 2,500 units but more than 3,700 new units were brought online. Average occupancy dropped a little more than 4% to finish February just below 86%. Both occupancy marks are well below the national average. Other areas like Flagstaff, Kahului and Lake Havasu City finished February above 94% average occupancy.

Rent growth over the last twelve months in these smaller metro areas with an outsized presence of workers in these industries can be cleanly split into two groups. The Flagstaff, Gulfport, Lake Havasu City and Myrtle Beach metro areas each touched or surpassed 4% annual effective rent growth. Lake Havasu City led the way with 5.6%. The remaining areas, Hilton Head Island, Kahului and Punta Gorda were well below the national average. In fact, the 1.5% gain for Hilton Head Island was the only gain above 1%.

Upcoming New Supply

One factor that is going to have a direct impact on how these areas deal with the economic impact of the COVID-19 virus and resulting measures is the volume of new supply already on its way. Construction delays can be expected, but for those properties that have already broken ground, there is little that can be done to alter the flow of new units.

The good news for these areas is that if just the subset of properties that have already broken ground but have not yet begun leasing is considered, the overall number of units in the construction pipeline for these metro areas winnows from 22,000 units to 6,000 units. Of those, 3,400 units are located in Las Vegas.

Rented vs Owned Households

Another factor that will affect the COVID-19 effects in these areas is the share of renters in each. The multifamily impact in metros with both higher rates of employed people in industries more quickly and more sharply affected by the virus and higher rates of rented housing will be more profound and more immediately observed. The national average is about 66% of households living in owned residences.

The average for these 10 metro areas is 70%, so at least there is not a heavy skew beyond the national average toward multifamily living in these averages. Beyond the averages some relevant differences emerge. In Homosassa Springs and Punta Gorda, the percentage of households living in owned residences is 83% in each. In Myrtle Beach that figure is 77%.

Multifamily households make up a far greater share of households in metros like Kahului, Gulfport and Flagstaff – each between 62% and 64% for households living in an owned residence. Las Vegas is even more skewed toward multifamily with a household home ownership rate of only 54%.

Takeaways

Metro areas like Atlantic City and Homosassa Springs appear to be better positioned to weather this storm than other areas discussed here. Each has a higher rate of home ownership than the national average, average occupancies comfortably above 90%, and strong annual demand in the year leading up to the drastic measures being undertaken because of COVID-19. Even so, Atlantic City, with its dependence on tourism to its casinos, beaches and boardwalk can’t be lumped into this good category.

The overall construction pipeline for these areas totals 22,000 units, but fortunately, only 6,000 have already broken ground but not yet begun leasing. This reflects an element of flexibility in putting new projects on hold that may be vital.

Las Vegas is in a class of its own within this group of ten metro areas – and for the wrong reasons. Almost half of the households in the market are renters, and nearly 40% of employment is tied up within these two industry categories. Both MGM Resorts and Wynn Resorts have already announced temporary closures of their properties and multifamily demand has been tepid over the last year. Average occupancy currently sits at 93%, but about 3,400 new units are currently under construction – which is more than double the volume of new supply delivered in the last year.

No market will emerge unscathed from the economic fallout of the COVID-19 virus and the resulting measures taken to slow its spread. However, the markets identified here are especially susceptible to an immediate and profound impact.

For more information about specific markets, please refer to ALN’s complimentary Market Review reports.