Earlier this month, the National Multifamily Housing Council (NMHC) released their rent-tracking data showing that as of August 6, 79.3% of apartment tenants had paid their rent. This is compared to 81.2% the same month in 2019 and an improvement over July 2020’s figure of 77.4%. Note that by the end of the month, all previous months this summer have jumped to just over 95% of tenants paying, which is comparable to 2019.
NMHC Chair David Schwartz had this to say about the recent data: “Over the past few months, apartment residents have largely been able to meet their housing obligations. In no small part, this is due to the enhanced unemployment benefits enacted under the CARES Act and significant steps by apartment owners and operators to help their residents. These unemployment benefits that have proven so important to so many households have now lapsed, meaning greater financial distress for millions and the potential worsening of America’s housing affordability crisis.”
This gives us a general idea of how the overall multifamily housing market is doing in the U.S. That said, it does not help us delve deeper into the weeds about how various segments of this asset class are performing: particularly Class B and C apartments. Let’s take a closer look at these segments and explore the data that matters to investors involved in these assets.
Class B and C apartments: new data
To begin, when referring to Class B multifamily buildings, we are generally speaking about well-maintained apartments in decent neighborhoods but that are older with aging infrastructure. Similarly, the term Class C apartments typically refers to buildings in lower-income, higher crime, and less gentrified neighborhoods, also with aging infrastructure and older units. Class C apartments are also poorly managed, making them prime opportunities for value-add investors.
The National Association of Realtors (NAR) last month released interesting data about these two asset types. Specifically, in a rental survey, NAR found that nearly 80% of renters who did not pay rent had a household income of $50,000 or less, with 1 in 5 not paying rent at all. Further, only 5% of renters with an income of over $100,000 did not pay or deferred their rent.
Therefore, rent collection in lower-tiered apartment complexes was strained. Scholastica Gay Cororaton, Research Economist for the NAR, concludes that “the lower-end segment of the apartment market has not escaped the impact of the coronavirus pandemic, with 20% of renters failing to pay or deferring rent in May 2020.”
New RealPage (NASDAQ: RP) data also paints a similar picture. According to Greg Willett, chief economist of RealPage. “RealPage information shows that missed payments are most frequent in lower-priced Class C properties,” he said in an Aug. 10 blog post. “Through August 6, this month’s rent was collected from 72.7% of the residents in the Class C stock versus the payment rates of 82% to 83% in the Class A and Class B inventories.”
Finally, CoreLogic (NYSE: CLGX) differentiates between higher- and lower-tiered rentals, noting that the latter are defined as properties with rent prices less than 75% of the regional median rent. In their recent data release, CoreLogic found that lower-priced rentals actually propped up national rent price growth. Specifically, rent prices for the low-end tier increased by 2.8% year over year in May 2020 whereas higher-priced rentals increased only 1.3% during the same period.
The bottom line
Understanding your target renter demographic and their current rent payment habits better will help you become a better investor. The current data seems to suggest that nonpayments and deferrals are higher among Class B and C apartment properties.
That said, rent growth is slightly higher among this asset class, making it continually attractive to acquire these properties particularly for the value-add component.