LWS Rental Market Update No. 8: Rent Collections Indicate Stability for Class A and B Properties
There has been great uncertainty for property owners and landlords as they brace themselves each month for rent collections during COVID-19. Last month we shared some early indicators and advice for landlords as they waded through the first month of rent collections. So, how did properties manage their April collections? Have we seen the full effects of the pandemic on rent revenues?
First, we'll address the data. What are property owners and firms reporting? Then we'll unpack why certain properties are reporting specific numbers. And finally, what are some recommendations for properties to take a more defensive approach right now?
Let's dive in...
Rent collection reports show greater stability in Class A and B properties
A vast majority of Canadians renting from larger corporate landlords appear to have paid their rent as usual last month. Reports from residential REITs — which manage some of Canada's biggest rental properties — show they've been able to collect 95% of gross rent or more. Canadian Apartment Properties Real Estate Investment Trust (CAPREIT) show that 98% of April rents have been collected from their portfolio, and well below 0.5% of residents are on a rent deferral program.
May rent collections are reporting similar — and in some instances — stronger numbers for Class A and B properties than last month. Many properties are projecting rent collections of 95% or more. We will continue to monitor this throughout the month in a follow up report.
On the flip side, data from RBC Economics show that smaller landlords will bear the brunt of this pandemic. The Canadian Federation of Apartment Associations indicated its members collected just 80% of rents in April. The collection rate was lowest among owners of buildings with one to two units.
Why Class A and B properties are more stable than others during COVID
There are a number of contributing factors influencing rent collections by property class. Data collected by SVN Rock Advisors provides greater scope into the reasons why certain property classes are more affected.
- Class A+ buildings with top-of-market rents, and A- and B-class buildings in higher-income neigbourhoods with plenty of seniors and pre-approved payments, saw few defaults.
- Buildings across Quebec struggled more, regardless of their age, than in any other location.
- Major markets including Toronto and Halifax had the highest rates of payment deferrals, regardless of the age of the building.
- C-class buildings in C-class neighbourhoods suffered the most, and more than anticipated.
- Tenants with the lowest rents were at the most risk of not paying because they're living closer to the margin with fewer savings.
A couple scenarios can be revealed from this information:
Scenario #1: Class A and B properties are more heavily occupied by tenants with greater financial stability, who are less likely to lose their income, or have savings to support them during this time. Therefore, the percentage of rent deferrals will be lower for these properties.
Scenario #2: Class C buildings, smaller landlords with only a few units, and areas with a higher number of COVID cases are likely to be the most heavily impacted during the crisis. This could be attributed to:
- Low income tenants living in Class C buildings or in smaller multifamily properties, are more prone to job loss right now, and have less access to savings.
- Lost temporary income due to business closures in cities with tighter regulations and denser populations i.e. Ontario and Quebec.
Final thoughts and recommendations going forward
It's difficult to know the full impact of COVID-19 on the rental housing market. However, the multi-family real estate sector in general remains a highly defensive asset class that can bear broad market swings.
Max Steinman, VP of Sales for LWS, shared his thoughts on the rental market outlook right now, given the current data on rent collections,
"Although Class A and B properties are still collecting rent, they must consider how oversupply will impact their ability to lease right now, and confront those challenges moving forward. Meanwhile, it's not all doom and gloom for Class C properties. Although they are experiencing more difficulty collecting rent, they have an edge over Class A and B to rent and fill vacancies faster. Both have challenges to overcome, but are not uncommon for these property classes, and not just pandemic-specific issues."
The key is to remain vigilant in your communications right now. For example, some communities are even reporting positive rent revenue for the month. Our client, Avenue Living, explains how they've adapted during these times:
"We have been in constant communication with our residents since the beginning of this crisis, working with them on any financial challenges they may be facing. We are actually not that surprised by our successful rent collection. Our residents are wonderful people who place a priority on their homes." – Louise Elsey, Chief Operating Officer of Avenue Living Communities.
Moving forward, here are some tactics being harnessed by property management firms to ensure rent collections continue to go smoothly:
- Launch an online resident portal to enhance resident communications
- Encourage rent payments by various direct deposit methods
- Investigate innovative methods to attract new residents, including various incentives and mobile and online property and suite tours (For more information on how to implement some of these tactics, go here.)