Make no mistake: Leasing traffic numbers are not good. They are bad.
Traffic to apartment property websites is down about 7.5% in the last week compared to the same period last year, measuring on a rolling seven-day sum on a same-store basis. Guest card counts plunged 27.5%. New lease signings over the same seven-day period plummeted an even deeper 40%.
But as bad as the numbers are, they aren’t as horrific as you might expect given quarantines, social distancing and mass job losses tied to the COVID-19 epidemic. Yes, leasing traffic has plummeted. But we’re comparing them to 2nd quarter 2019, one of the highest-demand periods of the high-demand era of the past decade. I wouldn’t have been shocked if the latest traffic and leasing volume numbers registered two or three times worse than they did.
Furthermore, the huge gap between the declines in leasing traffic and new lease signings suggests there’s some pent-up demand from renters waiting out quarantines before signing leases and moving in.
Third consideration: Trends in both website traffic and guest card creation are showing signs of steady improvement. Both traffic measures began cratering around March 11, the day the NBA suspended their season and Tom Hanks announced he had contracted the virus. Both metrics bottomed out around March 25, with guest cards down nearly 35% and website traffic down about 20%. While still down year-over-year, the trend is now curving upward.
Additionally, you could make a reasonable argument the much-anticipated results of April’s Rent Week (which showed a meaningful decrease in on-time rent payments, but still reflected the vast majority of renters able to pay) further demonstrate multifamily’s relative resilience over other real estate sectors. For example, The Wall Street Journal reported only 25% of retail tenants paid April rent in some malls and shopping centers. In the office sector, most buildings are largely empty as businesses temporarily shift to a remote workforce. And of course, the ails of the hotel business have well publicized. Even the industrial sector, widely viewed as recession-proof, reported tenants asking for rent breaks.
Of course, it’s way too early to draw sweeping conclusions. No one knows with confidence how long the epidemic will fester, nor do we know yet the full extent of the economic fallout. And none of this news should suggest apartments will escape COVID-19 unscathed. By year end, 2020 will almost certainly go down as the weakest year of the U.S. apartment market’s remarkable run over this past decade. Even if occupancy rates remain pretty healthy due to strong renewal demand, total income return will decline due to a likely increase in delinquency (exacerbated by eviction moratoriums) and limited new-lease rent growth. All that said, it’s still notable that leasing activity isn’t worse than it is.
One trend emerging from the latest data is that, in general, leasing traffic numbers are not correlated with late payment trends for April’s Rent Week. As RealPage Chief Economist Greg Willett noted, we saw lesser declines in on-time payments in large metros and in Class A product. Interestingly, these same categories experienced the sharpest drops in both traffic and new lease signings occur in pricier asset types. The West region of the country, home to some of the nation’s most expensive markets, recorded outsized drops in website traffic, guest card creation and new lease signings.
Generally speaking, that means the opposite product types – Class B and C and suburban and tertiary markets – are seeing comparatively lesser declines in traffic and leasing activity. This makes sense given these segments typically face less competition from high-priced new supply in lease-up and offer a lower price point. Tertiary markets, in particular, have been a relative standout in the COVID-19 era. Year-over-year declines in new lease signings have held around 25% for the past couple weeks, compared to a consistent 40% drop in primary metros.
Another positive is we are seeing signs that renewal demand is increasing. Retention rates are already high relative to historic norms, which helps operators protect occupancy rates. We’ve seen big jumps in rescinded non-renewal notices over the past few weeks in all product classes. (A rescinded notice occurs when a renter who previously planned to move out changed their mind and stayed put.) In the most recent seven-day period, rescinded notices jumped 20% compared to the same period last year. The spike has been especially pronounced in the New York and New Jersey area hard hit by COVID-19. Rescinded notices have also soared in high-rise properties across the country, which tend be concentrated in downtown areas where social distancing is most complicated.
What does all this mean?
Leasing traffic is still out there, and those looking for apartments right now tend to be serious shoppers – a trend we’re hearing from many operators right now too. It’s a good reminder that smart operational execution still matters.
Remember that demand is demand – whether it comes in the form of a new lease or a renewal. The upward movement in rescinded notices confirms our expectation that renewal demand should remain strong during periods of uncertainty. As many operators try to protect occupancy rates, do what you can to keep retention high through virtual resident engagement activities and attractive renewal pricing.
A strong renewal strategy helps offset the loss in new lease demand, helping you protect your rent roll by avoiding drastic rent cuts – particularly for floorplans with minimal exposure. Don’t just tether yourself to plunging rocks in the form of asking rents for comps – rates that go unsold the vast majority of the time right now – and hope that stirs up qualified leads.
Don’t throw away your screening thresholds out of desperation in hopes of protecting occupancy, only to later see a spike in delinquencies. High occupancy becomes an albatross when there’s no revenue coming from an occupied unit, and that also inhibits your ability to capitalize when the market rebounds.