The prior down cycle provides a useful picture of how the different classes of multifamily assets may perform in the coming downturn.
Every recession is different. Market dynamics may play out much differently in 2020 and 2021. Overall, Class B properties were hit the least hard during the last recession. Class C assets were the most impacted (Class A represents the top 20% of properties based on rent. Class B encompasses the next 60% and Class C the bottom 20%).
The analysis is based on class data from CBRE Econometric Advisors and is focused on the timing and level of changes in revenue, vacancy and rents. Revenue combines rents and vacancy--a kind of metro income measure--and is expressed as revenue per unit.
Economic Path Ahead: GDP -1.9% in 2020
CBRE economists expect the 2020 recession to be sharp but relatively short. There are far more unknowns than knowns with respect to how long and how deep Covid-19 will be impacting lives and the economy. Despite uncertainty, CBRE currently projects GDP growth to fall 5.4% and 17.9% in Q1 and Q2, and then begin to bounce back in the second half of the year. Full-year 2020 GDP growth rate is projected at -1.9%. The outlook for 2021 is a far healthier 5.8%. Pent-up demand and massive fiscal stimulus put into play this year are the major contributors to the late 2020 and 2021 rebound.
CBRE projects unemployment to rise to 6.1%, translating into a loss of 6 to 7 million jobs. While severe, the loss would be less than the 2008's recession of 9 million. Additionally, unemployment is expected to drop more quickly from the peak.
Factors Suggesting a Different Path Than 2008
Many factors will influence the market cycle over the coming quarters - some softening the impacts of the economic recession, others heightening them. Resident eviction moratoriums, government cash payments to renters, much lower expected turnover rates and near-term employment retention of professionals and others (given the labor shortages going into the recession) should help maintain occupancy.
High levels of recent and expected 2020 deliveries will add to the stressed market; properties currently in lease up will be impacted more than stabilized assets. Covid-19 will create delays in product delivery, however, which will benefit the supply/demand situation. The market's relatively strong position, especially for Class C and B, going into the 2020 recession will also provide some cushion to downward movement in market performance through 2020.
Class B Revenue Less Impacted Than Class A & B
Statistics reveal both a delayed drop off in Class B revenue during the Great Financial Crisis and less loss of revenue than Class A and Class C. Class B also returned back to its pre-recession peak fairly rapidly.
Class A assets had the deepest revenue fall from prior peak to trough: -13.4%. Class B fell 9.1% and Class C fell 11.4%. However, Class A experienced a pronounced recovery.
Influences on Class A performance included the relatively high level of construction and deep job losses leading to some residents of Class A assets moving down to Class B. Class C assets experienced more credit loss (residents not paying rent and breaking lease contracts largely due to job losses).
Class A Vacancy Experience Strongest
Class A and B assets maintained lower vacancies than Class C during the last recession. Class A improved slightly faster than Class B. Class A vacancy peaked the earliest and began to recover the earliest, with Class B trailing close behind. Class A vacancy recovered to its pre-recession level faster than Class B. Class C vacancy rose over a longer period than both Class A and B and its recovery was longer.
Class B and C have lower vacancies moving into the 2020 recession than they did going into the 2008 recession, producing a small cushion for the bumpy ride ahead. Class C's lowest vacancy in the past cycle was 5.2% (Q3 2006) compared to 3.6% in Q4 2019. Class B's lowest pre-2008-recessionrate was 4.5% compared to Q4 2019's 4.1%. Eviction moratoriums and government cash payouts over the coming months will also help preserve vacancy levels (but not necessarily property NOI).
Class B Rent Loss Lower than Class A and C
Historical data for the last recession shows that average rents for Class B assets fell less than both Class A and Class C. From peak to trough, the average Class B rent fell 7.7%.
Complicating the story is that the rent and revenue statistics do not capture the fact that Class A rents had experienced greater increases prior to the 2008 recession. Additionally, when Class A rents began to recover, the pace and new level reached were quite impressive. One factor contributing to the sharp rebound was "flight-to-quality" (renters moving from Class B to Class A assets).
Class C rents did not drop as much as Class A, but the period from peak rent to trough was longer. Class C began to recover after both Class A and Class B.