Like almost any economic slump before it, the coronavirus-triggered recession has pared down the money pouches of low- to middle-income renters more than it has undermined the budgets of their well-to-do peers. While working-class tenants have strained the most to cover their housing obligations (and other expenses) in the last four months, pressure has been building in the high-end segment of the rental industry as well, threatening to spill down the ladder.
The top section of the rental market (the so-called Class A properties) in any city commands the highest rents, housing residents who earn enough to own a home but for a variety of reasons opt not to. This type of tenants are often called lifestyle or discretionary renters. At first glance, they have seemed insulated from the immediate effects of the coronavirus.
Since April, renters in Class A buildings have kept a fairly stable share – at roughly 40% – of paying their full rent at the start of each month, according to LeaseLock, a rent insurance technology company. From January through March, the three-month average share of on-time, full-rent payments for luxury units was 45%.
Prior to the pandemic, renters in the bottom of the market (Class C properties) also held a steady record of promptly covering their housing obligations. LeaseLock states that the January-through-March average percent of Class C renters who made a full payment in the first five days of each month was 43%. Since then, however, that number has tumbled to 27% in July. By comparison, 39% of Class A tenants have already squared rent this month.
This is all positive news for the top echelon of the nation’s apartment industry, but it obscures the pressure points that are starting to concern some housing experts.
Some high-end renters are now seeking cheaper units
“Retention rates at the upper end have been declining,” said Yardi Matrix Vice President Jeff Adler.
This is despite the concessions that landlords have rolled out to entice tenants to sign new leases or recommit to old ones. According to a July bulletin released by Yardi Matrix, an apartment data servicer, rents of luxury lifestyle units have dropped by 1.2%, compared to only 0.5% for what the firm dubs “working-class, renter-by-necessity units.” This difference cues to shifting rental demand.
Several reasons explain why lifestyle renters seem to be downgrading.
While some high-end renters escaped the big cities at the onset of the pandemic to shelter in less-dense, secondary metros and summer-vacation destinations, others are moving out of their digs out of necessity. What initially were temporary layoffs in the service industries have now swelled to white-collar furloughs in major corporations. While the economy has added jobs back in the last two months, the resurgence of Covid-19 cases has reverted opening plans in several states, setting the stage of more terminations, especially among higher-paid workers, Bloomberg reported.
And, for those employees, jobless benefits are unlikely to substitute lost wages as much as they do for low-income Americans. “If you look at someone losing $100,000-a-year salary, the stimulus is not making up enough to cover their basic expenses,” said Elizabeth Francisco, president and founder of ResMan, a property management software company.
Already, the Census Bureau found that more than a third of households making $100,000 a year have lost some income since mid-March. In the latest Census survey, covering the last week of June, 7% of renters earning $100,000 or above said they have no or only slight confidence that they will be able to pay rent in July. Although only 3.7% said they had not paid last month’s rent, that tally is a little over a percentage point more than it was in May.
“[The] pressure at the higher end of the market will drift its way down,” said Adler. “We have always said that filtering of rents is a real thing.”
This drip, which, Adler said, is already occurring in expensive cities such as San Francisco and New York, could create a domino effect with higher-income renters displacing those earning less, who can no longer afford to pay for their units because of the heightened demand that could push prices up (or, at least, keep them steady in a prolonged recession).
Such a realignment would unfold on the backdrop of growing worries about impending evictions as moratoriums expire and federal stimulus payments run out this summer.
Further exacerbating the situation is the lack of affordable rentals, a fact that has plagued the industry for years. According to property management provider RealPage
Yet, most of the new stock would likely do little to allay the housing-cost burden of low- to moderate-income American renters as local sentiments as well as labor and material costs, among other factors, continue to push builders toward high-end developments.