Denver Market Update: May Rent Collections Report
May, 2020
April Revisions
After recent conversations with owners, we have adjusted our numbers to more accurately reflect April collection rates. With this updated information, the collections rate jumped to an average of 96% in the Denver MSA. This is a 6% increase compared to our prior reporting of 90%. The increase is due to residents fulfilling their payment plans, typically paying half on the first and half at the middle of the month. This is an incredibly positive sign for owners, managers, and investors. These collections rates are on par with pre-COVID levels. In addition to seeing significantly higher-than-expected collections, many owners and management companies are seeing fewer move outs, higher than normal renewals, and lower vacancy. This translates to lower expenses and higher bottom line revenues for owners.
May Collections
Our May survey consisted of just under 30,000 units in the Denver MSA. Collections as of May 15, 2020 are extremely strong, averaging 93%. This is 3% higher than this same time period for April. Most owners and management companies that we surveyed last month stated that they were more worried about May than April. By the time of May collections, residents would have been out of work for four to six weeks. This is especially relevant for Class C apartments, which have large renter populations employed by the service industry. While people have not yet returned to work, a vast majority of apartment residents continue to stay in good standing with their landlords.
Owners and managers were also concerned with the effectiveness of the stimulus checks, PPP, and CARES Act, fearing that it would be a slow and difficult process. While the PPP did run into issues, it was the only program to do so and was soon remedied by a second relief bill. Overall, these assistance programs went into effect more quickly and effectively than initially anticipated. With collections in May even higher than they were at this same point in April, owners agree that this is some of the best news they have received in the last two months.
As Denver moves from a stay-at-home to a safer-at home order, we can begin to envision a majority of people returning to work in the coming weeks and months. This does not mean that jobless claims will not increase or that we are in the clear, but it does signify the start of a gradual re-opening.
Outlook
June will be a critical month for owners, and we expect collections to remain impressively high. Solid collection rates will be supported as those who are able to return to work do so. Those who are unable will continue to collect unemployment through July.
As we take a step back and look three to six months out, we expect most things in the Denver MSA to remain relatively unchanged. As other product types struggle, we believe that apartments will continue to perform strongly.
One of the largest hurdles over the next few months will be bridging any gap between buyers and sellers. Some buyers believe that they will get steep discounts on pricing because of COVID-19. This expectation does not match the sentiment of sellers or the current data as collections remain high, vacancy remains low, and rents remain relatively unchanged. As we keep in close contact with lenders and MMCC, we have found there to be many sources for debt with the only caveats being tighter credit requirements. Despite these requirements, rates and leverage remain unchanged or even better than expected. There is more liquidity on the sidelines, and banks are more capitalized than ever. Based on these facts, it appears that seasoned investors are having no issues securing financing.
Apartment Pricing
We believe that there will be a large amount of pent up demand from May through the end of August from 1031 exchange buyers. This will help drive transaction volume until the market comes close to stabilization or equilibrium. When it comes to underwriting, we predict that investors will be more conservative on three major fronts: vacancy, rent projections, and location. Investors may underwrite higher vacancy rates than we have seen over the last few years. They could also project flatter rental rates until we get a clear picture of the market. Most investors have stated that they are actively looking for opportunities, but they have refined their investment criteria. They will not go outside of their “investment box”, turning down outlier areas. Investors will choose to stick with what they know such as properties in their own neighborhood.
Leasing
Most owners and management companies agree that leasing has picked up momentum going into the most leasing-heavy months of the year, especially over the last two weeks. Some even report having a waiting list. On top of increased demand, increases in execution and renewal rates are keeping vacancy suppressed. One owner has stated that leasing is “stronger than prior to the crisis.” Another owner revealed that they have several applications on one apartment, allowing them to increase the rental rate by $25 per month. One major management company stated that “leasing has actually been very strong for [them]... averag[ing] around seven leases per day last week. In April [they] averaged five leases per day, so [demand is] staying strong. [They] are seeing more people renew, just for shorter term leases... and are also seeing a spike in month to month leases.” Another management company stated that they signed 21 leases in the last two weeks. While this may not be the case for all apartment owners and managers, the overall trend shows that leasing is picking up and staying strong
Our Market Opinion
All the data continues to show us that our initial opinion on rent collections is, and will remain, high unless we move back to a stay-at-home scenario. Even if this is the case, we are under the belief that once the economy begins to open, legislation will not be able to close it back down with the same effectiveness.
In short, we are confident that apartments are going to outperform all other asset classes and do not predict a significant adjustment in pricing. Any potential adjustment will be based on more conservative projections of vacancy, location, and rent projections.
We anticipate that Class C vacancy will remain suppressed, driven by increased rental demand, lack of supply, more conservative renters, and the delay of construction projects. Should the levels of in-migration of individuals and employers from California, Illinois, and New York remain high, we will see further support of the rental market.
We have always believed that Colorado is uniquely positioned in comparison with the rest of the country. This belief is supported by the state’s continued economic standing as one of the country’s best performing markets. It has a young, highly educated, and diverse workforce with an extremely high quality of life. This will continue to attract people searching for a new place to call home. For the foreseeable future, we believe that investors will continue to move capital out of other states and into Colorado.
