The CARES Act and Apartment Markets

March 27, 2020

The CARES Act and Apartment Markets

March 27, 2020

The White House and lawmakers agreed to an approximate $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act to buffer the U.S. economy and aid financially stressed Americans during the COVID-19 pandemic.

The CARES Act represents the largest economic stimulus measure in modern U.S. history with the goal to send relief to workers, businesses, and hospitals. The package includes direct payments to taxpayers, expanded unemployment benefits, additional funding for hospitals and health systems, increased Medicare payments, emergency loans for small businesses, and bailouts for distressed companies. Furthermore, the CARES Act will impact apartment markets nationwide.

The CARES Act Key Details

On the individual level, taxpayers earning less than $75,000 per year will receive $1,200 in direct payments. Tax payers who make more then $75,000 will see their checks reduced by $5 for each $100 that a filers income exceeds the $75,000 threshold. A tax payer will be fully phased out at $99,000. For married households the threshold amounts are doubled. Families would receive an additional $500 per child. Beyond the direct payments, the relief package will extend jobless insurance by 13 weeks and includes a $600 weekly stipend for up to four months, on top of benefits already provided by states.

For renters, the payment may provide some relief, but it falls short of the national average monthly asking rent of $1,421 for a two-bedroom, market-rate apartment. Hoping to stave off some furloughs and layoffs, the federal government will guarantee community bank loans up to a combined $367 billion to businesses with up to 500 employees that pledge not to lay off their workers through June 30.

For larger, distressed company, loans would be available from a $500 billion fund controlled by the Federal Reserve. Of the fund, $75 billion is designated for industry-specific loans that includes $50 billion for airline companies.

How Will It Impact The Apartment Industry?

Realizing the situation that the industry is facing, the National Multifamily Housing Council (NMHC) provided guidance for apartment operators to work with residents to help them retain their housing. The NMHC suggested a 90-day moratorium on rent increases as well as creating a payment plan and waiving late fees for renters affected by the pandemic.

Additionally, the CARES Act establishes a 120-day moratorium on beginning proceedings to evict tenants for nonpayment of rent or other charges for tenants in federally-backed housing.

It will remain to be seen whether the guidance suggested by the NMHC and provisions of the CARES Act can help keep renters in their homes and paying rent. In the meantime, many industry professionals are looking to the crisis of 2008 to provide an example of how the apartment industry fared during a recession.

Demand during this period amounted to less than half of new supply levels. This resulted in average apartment occupancy bottoming out at 92.1% at the close of 2009, down from 93.6% at the start of the financial crisis.

That trough marked two years from the start of the Great Recession and when performance metrics started to get back on track. Driving the recovery was net monthly job gains at the national level and a drop in unemployment.

The apartment industry came out of the 2008 financial crisis with two major impacts. First, there was a slowdown in overall development and second, class C apartment product experienced a fall in occupancy as many renters in this segment suffered income disruptions .

Compared to 2008, the demographic composition now is more favorable to the apartment market with homeownership rates lower among millennials and baby boomers. With average apartment occupancy at 95.8% in the fourth quarter of 2019, even if apartment operators see a 150-basis-point drop similar to the last recession, occupancy would still be higher than the start of the financial crisis.

Berkadia is prepared to assist our clients and partners in facing the new challenges and realities presented by COVID-19. Please continue to visit our blog and our research resources for up-to-date info about COVID-19 and its impacts on the multifamily industry.