In the wake of the highly controversial decision by the CDC to extend the eviction moratorium, I have been thinking a lot about the ramifications of the moratorium and its eventual lifing. How will operators react? Are we simply delaying a flood of availability? How will it effect rent levels as that inventory comes on market? A line of thought that eventually brought me to:
How has it effected rent levels already and what is the cost to the rest of the Nation’s renters?
To answer that last question, I started to do the math.
A general rule of thumb in budgeting for the multifamily space is to expect about a 4.0% skip and/or eviction rate, or about 1 per month on a 300 unit building. Certainly not a hard and fast rule but a guideline many use and experience. Meaning that on a 200 unit property, 8 leases either skipped or were evicted from their residence annually. Now that may not seem like a lot but let’s build some context here. As observed from the RealPage lease transaction data set, In 2019 the national achieved renewal conversion percentage was 53.1%. This means that on our hypothetical property, 94 of the units would turn annually. Since a lease that terms early is not a renewal, it is safe to assume that 8 of those 94 units that turned were a direct result of either skip or eviction. That is 8.5% of the turned inventory annually.
OK Andrew, we get the math but why does it matter.
In 2021, the national average renewal conversion rate rose to 55.6%, meaning the annual stock turned on our hypothetical asset dropped from 94 units to 89. Except it didn’t. It dropped to 81, a full 13.8% year over year decrease in available inventory to rent.
How you ask?
Because all of the inventory that normally would have been turned through the eviction process or renter leaving early are still being occupied by the renter who is behind on their rent payments. I can’t imagine that renewal contracts are being executed between the landlord and the tenant in that situation and we know they are not being forcibly removed so these units are not in either the executed renewals nor on an availability report. So while in previous years the inverse of renewal conversion was a good proxy for available units to turn; mid eviction moratorium it is no longer accurate.
Now it doesn’t take a revenue management expert to cast forward the impact of a 10.6% reduction in available supply annually and how that will affect rent growth numbers. Even operators leveraging manual pricing are seeing 13.8% less on their availability reports and reacting as best they can. Those who are using revenue management tools are seeing rents move at breakneck paces as the models see a clear imbalance between supply and demand and are reacting accordingly. Compounding the decrease in supply is a spike in demand, as measured by the number of leads per total units, that is up 35% through the first six months of the year as compared to the first six months of 2019. In other words, we are in a year of incredibly high demand but also a year of constrained inventory due to public policy. It is the perfect scenario for aggressive rent growth which can clearly be seen when we look at lease over lease trade out, otherwise known as replacement rents.
The impact? While the 4.5% of renters who would normally be displaced are able to remain in their homes, a measure that was absolutely needed as the economy locked down, the other 95.4% are taking the brunt of the unintended consequences.
If we look at year over year asking rent growth in 2019 vs. 2021, the costs of those consequesnces starts to be revealed.
In June of 2019, asking rents grew 3.06% year over year. In June of 2021, they grew 6.25%, which is 73% higher than the ten year average of 3.6% annualized asking rent growth. So with very fuzzy math we can extrapolate the theoretical burden the rest of the renter base is bearing.
Now admittedly, I am not considering the entire SFR marketplace in my estimates, which could easily double the impact, but that is $9.9 Billion in real cost to real people who are getting no assistance at this point.