Report Documents Rental Market Stresses After Recession

According to a report prepared by the Joint Center for Housing Studies at Harvard University and released August 9, the current rental market is recovering, with growing demand and rising rents but also stubbornly high vacancies. While in some areas growing demand and a lagging supply is leading to reduced vacancies and increased prices, it is also the case that long-term unemployment and lagging incomes are putting pressure on units on the margins of financial viability (primarily the lowest-rent properties), resulting in failing maintenance and, ultimately, vacancy. This bifurcation of the market, with strong and weak segments, is exacerbated by the current financing environment for rental housing. Available capital is flowing into the highest quality properties in the stronger markets while less attractive properties in less attractive markets are facing a tightening of credit.

The first part of the report is an analysis of rental affordability based on a series of standard analyses, such as the comparison of summary rental affordability statistics which first appeared in a seminal 2004 paper by John Quigley and Stephen Raphael; HUD’s worst case needs; and the concept of the Supply Gap associated with both HUD and NLIHC. The authors conclude that all these measures tell a similar story: falling real incomes, changes to the distribution of income and a decline in the supply of modest and low cost rental units have increased pressures on renters over the last three decades and the recent recession has made things worse. Though they note the data is fragmentary, the authors also find that as the types of rental assistance changed from public housing and project based subsidies to vouchers and tax credits, the majority of assisted renters (57%) now pay over 30% of their income for housing and nearly a third (31%) pay over half their income. 

The report also explores metropolitan area patterns and trends. The authors suggest that local markets and policies greatly affect the outcomes for renters as some of the lowest cost areas have the highest shares of cost burdened renters and vice versa. 

The second part of the report focuses on the challenges to the sector, primarily as they relate to loan performance and financing for large multifamily properties. This section was informed by a number of expert interviews. 

The analysis begins by noting that the rise in large multifamily property prices actually exceeded the surge in the price of single-family homes during the inflation of the bubble. While the S&P/Case Schiller single family home index climbed 76% from 2000 into 2006, over a similar period the Moody’s Commercial Property Price Index for apartment building climbed 95%. The authors also found that while in the wake of the implosion of the for-sale market the rising pool of single family rentals was met with strong rental demand, this initially seems to have come at the expense of larger multifamily properties where vacancies rose dramatically. 

These trends led to growing default rates and spurred concerns about a foreclosure crisis similar to what occurred on the single-family side engulfing multifamily. Thus far, this has not happened; recently vacancy rates in larger buildings have also begun to decline. One reason foreclosure trouble has been avoided in larger apartment buildings is that defaults among these properties are immediately referred to a “resolution team” that works with the owner to avoid foreclosure and maintain the value of the properties. The report does not address the financing difficulties of smaller properties. 

Given strong incentives to maintain cash flow and therefore tenancies in larger troubled buildings and the passage of the Protecting Tenants at Foreclosure Act of 2009, which provides tenants with specific tenure rights after a foreclosure, the primary risk to tenants from the current crisis the authors cite is a lack of investment by failing owners or banks and the deterioration of the property. Maintenance is a particular problem for the lowest rent buildings because “tenants are unable to reward better maintenance with additional rent.” 

The report, Rental Market Stresses: Impacts of the Great Recession on Affordability and Multifamily Lending, was prepared for the What Works Collaborative, a partnership of funders and research institutions.  It can be found at http://www.urban.org/publications/1001550.html.