Monthly rent and vacancy data confirm the negative market impact of COVID-19 and the resulting economic downturn.

Vacancy rose 30 bps to 4.75% in May (+180 bps annualized). May's vacancy level is still quite acceptable and a 30-bp rise is moderate, but the increase confirms falling demand. Vacancy normally falls in the spring due to increased seasonal leasing activity and higher demand.

MF Rent Vacancy in COVID-19 Era_Figure 1

This year, COVID-19 led to an immediate and large drop in leasing activity. While May leasing momentum improved from that of late March and April, new leases did not totally fill vacated units. Job losses, employment uncertainty and stay-at-home/work-from-home orders persuaded some renters to leave the rental pool (doubling up with friends or family), behavior typical in recessions.

From March to May, the average effective rent fell 1.7% to $1,412 (9.6% annualized change). Effective rents include concessions.

MF Rent Vacancy in COVID-19 Era_Figure 2

With more units to fill, owners became more competitive in pricing. This pertains to both renewal rates and rental rates for brand new leases. The Axiometrics rent data does not differentiate between renewals and leases on vacant units. Based on anecdotal evidence, rent changes on renewals have fallen to near zero (from the pre-COVID-19 level of about 4.5% year-over-year), while rents on new leases are lower than pre-COVID-19 levels.

Further market deterioration is anticipated. CBRE Econometric Advisors forecasts vacancy to rise to 7.2% by Q4 from Q1's 4.2% and effective rents to fall 8.4% between Q1 and Q4. After Q4, the market should experience steady improvement and fully recovery by early 2022.

Midwest Metros Holding Up the Best

Market performance varies significantly by region and metro. Better performing markets tended to be smaller metros and/or in the Midwest. Generally, Mid-Atlantic and Northeast metros also were performing better than average. The weakest metros were primarily in California and Florida. The Southeast markets, in general, exhibited greater rent losses and/or vacancy gains than the U.S. average.

The variation by metro can be explained both by economic and market factors and by other factors. In general, the worse performing markets fell into four categories. First, many have economies impacted particularly severely by employment loss.

Second, the significant fall off of leasing activity had an amplified impact on formerly dynamic high-growth markets. These markets depend on robust levels of spring leasing, which did not happen this year. Most also have high levels of new supply exacerbating the market performance.

Third, markets with large student populations were particularly hard hit with many students returning home.

Fourth, some markets, especially high-cost markets, have become more politicized. The stress of job losses on top of high rents and limited affordable product has created a more politicized environment and greater regulation (or proposed regulation) of rental housing.

Other factors influencing vacancy and rent change include the timing of the spring leasing season (spring comes later in northern metros, so the lack of spring leasing impacted these metros less than the Sunbelt), the market's level of COVID-19 cases and variations of stay-at-home mandates and phasing of reopening businesses and other activity.

MF Rent Vacancy in COVID-19 Era_Figure 3

MF Rent Vacancy in COVID-19 Era_Figure 4

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