The Good Times Continue...
I just returned from the NMHC Annual Meeting last week, and I’m feeling excited about what’s in store for 2020. In the interest of providing valuable insights on what the multifamily industry can expect, I’ve highlighted key trends and takeaways, and assessed what the implications are.
According to NMHC, A Positive 2020 Outlook For The Multifamily Industry
At the start of each new year, we expect to feel refreshed and optimistic, especially as we leave 2019 on a strong note and enter a new decade.
After listening to multifamily experts and leading economists on various NMHC panels this week, I’ve learned that the apartment sector is expected to serve as a pillar of strength despite economic uncertainties.
David G. Shillington, President of Marcus & Millichap, says “There is clear evidence that multifamily is the asset class best equipped to weather a downturn.”
Consider the following factors, all of which speak to a strong rental market primed for growth:
- multifamily occupancy hit a 20-year record
- construction at a 12-year high
- jobs are aplenty
- unemployment at historic lows
While the market performance and sentiment point in a positive direction, the U.S. still faces a mixture of geopolitical and economic uncertainty due to:
- stagnant wage growth
- stock market volatility
- trade wars
- polarizing presidential impeachment
Over the last 10 years, we’ve observed rapid growth that many believe simply isn’t built to last. We know this is on your mind—even multifamily investors said a recession is their top concern this year. Though fears of a recession have diminished and 2020 appears to remain positive for multifamily, it’s difficult to predict the next downturn.
The state of the economy beyond 2020 is simply uncertain—what could that spell out for the rental market long-term?
Multifamily Sector To Maintain Solid Growth In 2020, But Uncertainty Looms Beyond
We understand the natural ebb and flow of economic cycles: periods of economic expansion are often followed by downturns. This principle also applies to the rental market—a market that has become oversaturated with excess supply, bringing a forecast of stagnant national rent growth and occupancy rates.
Toward the end of 2019, Chief Economist at RealPage, Greg Willett, originally projected that apartment rental rates would slow in 2020 from an annual growth rate of 3% to a range of 1.5-2%. Now it’s shaping up to be more in the range of 2-2.5%.
In RealPage’s 2020 U.S. Apartment Outlook, Willet revealed his prediction: “Setting expectations for this year, we’re anticipating that annual rent growth in the U.S. as a whole eases a bit, but not drastically.”
Rent growth won’t accelerate in 2020, but it’s not flatlining either. Greg Willet listed the signs of slower growth, including:
- global economic stress
- waning confidence among corporate employers and high income households
- slower job growth
As a result, 2020 will see a slight pullback in apartment demand, construction, and occupancy.
Some experts have speculated that a recession is on the horizon, but others have only anticipated a mild one, if that. Whether a downturn occurs exiting 2020 or in 2021, this means:
- renters will have less disposable income, translating to lower rent affordability
- rental apartment construction will slow
- vacancies will rise
- property owners will expect management to tighten their belts, maintain high occupancy rates, and decrease bad debt
It makes sense then that panelists at NMHC would emphasize the goal in 2020 should be to increase income and reduce expenses.
So, how can apartment operators cut their losses and costs when the rental economy is at risk of a downturn?
A Simple Solution To Future-Proof Against Economic Uncertainty
It’s important to understand the potential economic impact on multifamily and prepare for the possibility of slower rent growth and lower occupancy between now and 2021.
CEO of Marcus & Millichap, Hessam Nadji, addressed fears of a downturn with a positive outlook. Using company clients as an example, he noted that they mitigated the impact of the Great Recession because they didn’t over-leverage themselves—something to keep top-of-mind in the event of a downswing.
In the meantime, it makes more sense to be proactive now rather than reactive down the line. Now is the right time for apartment owners and operators to implement growth-driving solutions—not when the economy spirals in the coming years.
So, owners and operators need to accomplish two things in order to support current growth and protect against economic hardship:
- increase occupancy
- reduce bad debt
To accomplish both these results, properties should consider eliminating security deposits altogether
Why You Should Eliminate Security Deposits In 2020
Many renters shudder at the mention of security deposits, even in a healthy economy. In Zillow’s 2019 Consumer Housing Trends Report, 49% of adults say they can’t cover an unexpected $1,000 expense. Imagine how they’ll feel in a bad economy.
And it goes without saying that apartment owners and operators could do without the risk and administrative hassles associated with security deposits.
The solution? Lease insurance. Lease insurance removes security deposits entirely and replaces them with an affordable monthly fee. By eliminating the dreaded upfront cost of renting, apartment communities realize a significant boost in their closing ratio, and an average of one new lease per month.
At the municipal level, city governments like Cincinnati are calling for legislation that replaces security deposits with lease insurance programs. The key here is recognizing that lease insurance is both an immediate and long-term solution to the affordability crisis.
LeaseLock Zero Deposit is the only major lease insurance program in multifamily that future-proofs against economic uncertainty by doing the following:
- increasing occupancy by ~5%
- reducing bad debt by ~50%
Remember the chart showing stagnant rent growth and occupancy rates? When rent growth stagnates, it’s crucial to maintain your occupancy and cut expenses.
How Does Lease Insurance Work?
LeaseLock Zero Deposit eliminates security deposits, surety bonds, and guarantors to provide $5,000 of coverage on every lease, while renters pay a low monthly fee starting at $19 rather than thousands upfront. This insures properties from rent and damage loss, protecting properties from the dangers of a shaky or sputtering economy. Renters save thousands of dollars at move-in, while properties close more leases and eliminate losses.
The Case For LeaseLock Zero Deposit
Bottom line—Zero Deposit drives NOI. With the basic net operating income (NOI) calculation, we combine 1) revenue growth due to increase in new leases and 2) bad debt reduction provided by the lease insurance coverage:
Revenue Generated + Expenses Eliminated = NOI Increase
For example, a client that generates $150,000 in new rental income per property annually and eliminates $30,000 in bad debt reduction per property annually has a NOI increase of $180,000 per property.
This simple calculation highlights the importance of implementing a solution that simultaneously boosts revenue and slashes expenses. LeaseLock Zero Deposit does just that. In fact, a recent internal study conducted by a Top 5 NMHC client showed that LeaseLock reduced bad debt exposure by about 3X as much as a major surety bond provider.
The proof is in the math—the best way to future-proof against economic uncertainty is to implement solutions that reduce expenses and generate revenue—like lease insurance. It’s a win-win for properties and renters.
Multifamily Needs Simplicity & Automation—Lease Insurance Provides Both
Measuring economic uncertainty may prove impossible, yet evaluating the risk to plan around it is something all apartment owners and operators should do. We can’t guarantee when the next recession will hit, but we can guarantee that LeaseLock will help solve for it when it does hit.
Simplicity and automation is what the industry needs and wants, as they maximize efficiency, alleviate administrative hassles, and improve resident experiences.
NMHC speakers addressed the importance of multifamily operators embracing technological change to keep up with the demands of renters. CEO of Nestio, Caren Maio, stated, “I’m excited to pull best practices from insurance and hospitality and apply them to multifamily.”
LeaseLock Zero Deposit is seamlessly integrated into existing workflows, and automates the lease experience to directly support your property’s growth. In doing so, it protects your property from future economic uncertainties by lifting occupancy and reducing bad debt.
Multifamily is strong entering 2020, and I can’t stress the importance of proactively supporting growth through the year to future-proof your business when a downturn strikes. Be proactive, not reactive.