How Did COVID-19 Impact Rental Housing Portfolios?
To understand the impact of COVID-19 on rental real estate, we surveyed 440 landlords and 1300 tenants who use our system. In addition, we have access to a wealth of internal data from tens of thousands of users. We looked at what sectors the pandemic affected the most and some ways landlords adapted their portfolios.
The Big Picture
According to our survey, 14.1% of landlords backed out of a deal because COVID-19 and 26.1% of landlords saw negative portfolio impacts. These findings mirror those of Buildium, which found that 13.4% of landlords backed out of a deal, and 27% saw adverse portfolio effects because of the virus.
Perhaps the reddest flag of financial hardship is the number of tenants forced to sell a property because of the pandemic. In our survey, 5.5% of landlords said they sold at least one property directly due to the financial ramifications of COVID-19. The National Rental Home Council Survey reports that 11% of landlords had to sell a property because of the pandemic, which is closer to the industry averages. Both of these statistics exclude owners who sold for reasons other than the pandemic.
Part of the difference between survey results is the audience. Our survey polled users of Innago, our property management software, so the improved communication, utility, and adaptability Innago provides may account for some discrepancy. Also, our survey respondents tend to have more residential portfolios than commercial, and residential property owners felt the least impact of COVID-19.
Portfolio Impact by Real Estate Sector
It may seem counter-intuitive that residential portfolios were least impacted; the eviction moratorium affected almost exclusively residential properties, after all. Yet residential renters often have a spouse or roommate to fall back on, which makes them more resilient to the financial pressures of the pandemic. And though underwhelming so far, rent relief has also contributed to stabilizing the residential market.
The pandemic hit student housing the hardest, with 16% of landlords forced to sell because of COVID-19. Because colleges and universities went online-only last year, the demand for these leases dried up. The specialized nature of student housing makes it difficult to rent to other tenants, which explains the high number of distressed student housing landlords.
On a broader note, the pandemic has caused colleges to re-examine which classes to offer in person, and we will likely see a more hybrid approach to higher education in the future. This approach presents hope for a recovery in the student housing sector in 2021 and beyond—even in a hybrid system, students can’t or (don’t want to) live at home.
Commercial properties lie somewhere in the middle, at 13% forced to sell. Businesses that go under are usually gone for good. In addition, even though the eviction moratorium doesn’t cover private leases, evicting a commercial tenant takes longer and costs more than evicting a single resident.
Often, a commercial tenant is a subsidiary of a national company located nowhere near the property in question. The distance causes legal and communication issues between landlord, tenant, and the national company, especially if the breach of lease is not merely local, but a result of the entire overarching company filing for bankruptcy. Such a case often results in the local commercial renter staying in the property for months without paying rent.
Portfolio Adaptations
Compared to a typical year, vacancies are up, and 45% of landlords in our survey said it takes longer to fill them. We have a separate article on the adaptions landlords have made during the pandemic, but we’ll cover some portfolio-specific adaptations here.
As businesses closed their offices and people worked from home, the prospect of living in a city paled. With proximity to work no longer a factor and city living increasing the risk of COVID exposure, many people began migrating toward housing in the suburbs or in “Zoom towns”—remote locations near beaches, ski resorts, or national parks. This is a change from consistent migrations toward urban centers for the last decade, providing one of the few growth opportunities for investors during the pandemic.
The other significant portfolio adaptation we’re seeing is shorter-term leases on quickly repurposed property. Hotels closed or drastically scaled back during the pandemic, forcing those who still had to travel to turn to temporary lodging apps like Airbnb.
Airbnb allows landlords to charge higher-than-residential rent on short-term tenants, but it does come with an increased risk. The tenant screening process is not as thorough, and landlords are still responsible for what happens on their property. It’s also harder to receive amends for property damage. Still, if you own a charming vacant spot and are willing to bear some risk, shorter-term options like AirBnB present an alternative to traditional residential rentals.
Investment During the Pandemic
Investment data reflects the trends of each sector, with approximately 50% of investment going toward residential units, 40% toward commercial units, and 10% going toward student housing, according to real estate investment firm CBRE. The firm also projects a 33% growth in total rental property investment through 2021.
Another promising sign: RealPage expects rent growth will bounce back from a 1% downturn in 2020. Although growth will still be slow this year, RealPage predicts rent growth will turn positive, and expects a return to typical levels (around 3% growth) in 2022.
Not all landlords were impacted negatively; 13.6% of landlords we surveyed said the pandemic had a positive effect on their portfolios.
Investors thinking of expanding their rental portfolio should use caution. Although low interest rates make investment attractive, they also inflate prices. Distressed landlords may present bargains, but finding suitable investments requires some due diligence.
Wrapping Up
The pandemic hurt all sectors of the rental market, especially student housing, but there were opportunities buried in the hardships. Landlords suffered, but they are weathering the storm—in part by finding new markets for their inventories. Future growth projections look promising, as does the gradual re-opening of the country. Though there will be some lag between the two, the rental market’s recovery will come with the end of the pandemic.
