While the housing sector has weathered the COVID-19 pandemic reasonably well due to federal stimulus payments and expanded unemployment benefits, problems for multi-family wealth may be on the horizon, according to Fitch Ratings.
Fitch said US residential REITs with high exposure to B and C class assets and real estate in gateway cities are vulnerable to the economic fallout from the coronavirus pandemic due to the risk of urban evacuation and high job loss among lower-income households.
Fitch cites Federal Reserve data showing job losses are highest among lower-income households. Others see the same trend. "Low-income workers don't feel financially stable," said Joseph Biasi, a consultant at CoStar Advisory Services GlobeSt said in a previous interview. "You can see that in those who make less than $ 75,000."
Unemployment in lower-income households increases the risk for REITs in homes with significant exposure to B and C assets in low-income areas. However, according to Fitch, the pressure could be partially offset by tenants switching to B and C properties due to the higher affordability.
Another risk factor for apartment REITs is exposure to gateway cities, where the pandemic is oversized due to the density. Like others, Fitch speculates that renters will move to cheaper suburban and sunbelt markets as they seek more space.
Biasi told GlobeSt that he sees similar trends. "We'll see some of these higher-income households move into the suburbs and benefit from cheaper rents," says Biasi. "They also have a little more space because they are no longer in a city."
Many of these tenants could be in single family homes. RCLCO predicts this, for example The demand for rental apartments is expected to increase.
"Given demographics, RCLCO is forecasting demand much greater than the current pace of production, which could result in a significant supply shortage, suggesting that the sector has a strong market opportunity in the next decade," according to the RCLCOreport, headed by CEO Gregg Logan and Todd LaRue.
If this city flight continues The concessions are likely to increase further in class A apartments in gateway cities. Persistent geographic and age preferences of tenants in shifting demand could limit longer-term growth rates for these assets, Fitch said.
While larger than expected declines in net operating income in the same business could put ratings under pressure, most Fitch-rated companies are able to withstand expected levels of late rental payments, which are in line with recent trends. Still, according to Fitch, government-mandated moratoriums on evictions, high unemployment, and lack of permanence in federal incentives are negative for the top line of REITs.