Charlotte's multifamily industry sees dip in renters paying on time — but bigger impacts lie ahead

Charlotte Business Journal
By Ashley Fahey, Real Estate Editor

A new tracker studying on-time rent payments showed a noticeable dip in the number of Charlotte households that paid their rent on time in April, underscoring the struggles felt nationally as unemployment claims soar and the economy drops amid the COVID-19 pandemic.

A study done by data partners including the National Multifamily Housing Council and RealPage found about a quarter of Charlotte’s renter households did not pay rent on time — by April 5 — an 8.1% increase from the previous year. The COVID-19 pandemic began battering the Charlotte region's economy by the middle of March as stay-at-home orders were issued and businesses closed.

The markets most impacted nationally were, unsurprisingly, ones with a higher share of tourism and hospitality employment, said Carl Whitaker, manager of market analytics at RealPage.

Compared to the U.S. national average of 69% of households that paid rent on time, Charlotte fared comparably well, Whitaker said.

But most who observe the apartment industry say bleaker times are ahead for renters and landlords.

Stay-at-home orders for the state of North Carolina and Mecklenburg County run until the end of April, with the possibility of it being extended into May. Meanwhile, about 16.6 million nationally have filed for unemployment in the past three weeks, with nearly 500,000 of those in North Carolina.

In March, most workers — even waiters or bartenders — had some amount of income coming in but it will, likely, be a different story when rent is due May 1. Data on how many renters are able to pay May rent will provide a clearer picture in assessing the health of the industry as well as whether the federal stimulus has offset costs, said Nellie Shipley Sullivan, a partner specializing in commercial real estate at Womble Bond Dickinson.

In the meantime, several landlords in Charlotte have tried to work with tenants. Grubb Properties CEO Clay Grubb said last week the firm offered a 10% discount to all apartment tenants if they paid on time and allowed payments to be split between the first and second half of the month.

Camden Property Trust (NYSE: CPT), an apartment REIT based in Houston with a dozen properties in Charlotte, launched a $5 million relief fund for tenants who lost their income because of COVID-19.

That fund was depleted in 16 minutes.

Because of the uncertainty around how many tenants will be able to make rent payments, especially in the next month or two, national industry groups are pushing the federal government for more assistance.

The NMHC and the National Apartment Association co-signed a letter to Steven Mnuchin, U.S. secretary of the treasury, and Jovita Carranza, administrator of the Small Business Administration, this week asking to reverse regulations precluding the multifamily industry from qualifying for the Paycheck Protection Program, an emergency loan program for businesses impacted by COVID-19.

“Like many of our residents, the entire industry is facing extreme economic hardship," Pinnegar said. "Apartment owners and operators must qualify for relief under the Paycheck Protection Program. Until Treasury and the SBA correct this imbalance, the housing and employment of a combined 57.5 million Americans is in jeopardy.”

Where's the rent relief?

While a state moratorium on residential evictions is currently in place, there's a lot of concern in the industry that, even if rent payments are deferred, households will still struggle to pay bills when stay-at-home orders are lifted and courts reopen.

And if property owners aren't able to pay mortgages, apartment properties could face loan defaults and foreclosure.

The city of Charlotte is receiving $5.6 million total from the U.S. Department of Housing and Urban Development in two separate buckets. The city's housing and neighborhood services department has proposed to use the money for new extended-stay rooms for the homeless, a mortgage relief package, security deposits and utility assistance.

While the proposed allocation is expected to assist thousands of households, there's no funding for rent relief, a move some council members at Monday night's virtual meeting questioned.

The COVID-19 Response Fund, managed by the United Way of Central Carolinas and the Foundation For The Carolinas, has raised more than $15 million by companies, philanthropic organizations and individuals. The fund is geared toward nonprofits working with residents needing assistance with necessities like food and shelter because of the pandemic.

Clark said the volunteer committee advising the fund is working very closely with Mecklenburg County and the city to see what's being funded with federal assistance and where the gaps are.

The committee is also having to balance short-term, immediate needs with longer-term issues that will inevitably come out of the pandemic, even when businesses start to reopen.

"The money we've raised is a testament to the generosity (of the community) but the needs are going to outstrip that," Clark said.

Kim Graham, executive director of the Greater Charlotte Apartment Association, said the group is mulling the possibility of establishing a fund — perhaps with a foundation — geared entirely to rent and mortgage relief as well as providing shelter for families. The GCAA is also exploring whether the state has a rainy day fund that can help with issues like rent relief, Graham said.

Be nimble in negotiations

Apartment landlords generally won't be able to negotiate a one-size-fits-all approach with tenants, Sullivan said. Owners should be nimble and work with tenants to assess their individual situations and work out a payment plan.

In many cases, rent deferment is possible, but terms can vary widely. Without any insight yet on when businesses can reopen, when people will be rehired or land a new job, and when stimulus money gets to individuals and businesses, it makes setting concrete amortization terms that much harder.

"That’s part of the challenge and the anxiety: everybody doesn’t know what they’re looking at so they can’t structure a deal around it," Sullivan said.

She's advised landlord clients to have a simple intake form ready when tenants approach them about deferring rent. That will help assess an individual tenant's needs, such as their employment status and whether paying a portion of the rent would be possible instead of an outright deferral.

The persistent worry is if too many bills get deferred — with a future outlook that's cloudy at best — renters may not be able to catch up. At some point, courts will start to reopen and the moratorium on evictions will be lifted.

Tenants are being advised to pay what they can — even if it's just half of a rent payment — to avoid creating too much owed down the road and, at the same time, help chip away at the landlord's immediate financial burden, Sullivan said.

A similar negotiation should play out between financial institutions and borrowers. Sullivan said the multifamily owners she's spoken with haven't had to request relief as urgently as other commercial property owners, especially retail landlords, but expects that to change moving into May.

As part of its COVID-19 response, the federal government put into place protections for federally backed mortgages. The Federal Housing Finance Agency said Fannie Mae and Freddie Mac will offer mortgage forbearance for apartment owners if they suspend evictions for tenants unable to pay rent because of coronavirus impacts.

But those relief options won't apply to most apartment properties, the majority of which are backed with conventional mortgages, Graham said.

"We need to open up the federal assistance to conventional mortgages issued by any financial institution that’s federally insured and not just Fannie- and Freddie-backed mortgages," Graham continued.

GCAA members have reported working with lenders to get some kind of forbearance on their debt payments. But, sometimes, those requests have been met with a fee that's almost as expensive as a debt service payment, Graham said.

A lot of variables remain that will determine the industry's health when May rent is due. But if the statistic of 25% of rent payments not being made in Charlotte continues — or gets worse — the industry will start to see foreclosures, Graham said.

In an apartment property with hundreds of units, that could result in a lot of households facing eviction.

"A foreclosed apartment community is not a stable place for families to live," Graham said.

Future outlook

The number of apartments built in Charlotte in the most recent expansion has been remarkably high.

In fact, the Charlotte region saw the highest relative inventory growth between 2010 and 2019 than any other market in the nation, about 40%, Whitaker said.

Despite a huge wave of units hitting the market, demand has for the most part met supply, leading to good absorption and rent growth.

So what impact does COVID-19 have on arguably one of the healthiest apartment markets in the country?

Short-term, occupancy and rental rates will take a hit, Whitaker said. Areas like uptown, which has had a lot of new supply come online, may see the biggest impacts. CoStar Group found a 0.8% dip in rents in Charlotte in the last two weeks of March, surely an early sign of more dramatic decreases to come.

CBRE issued a report this week predicting the pandemic will result in increased multifamily vacancy and declining rents over at least the next two months, with the market bottoming out in the third quarter and starting to rebound in Q4. CBRE is predicting the national vacancy rate to rise to 6.3% by Q3 and rents to drop 6.7% from Q3 2019 to Q3 2020.

The long-term outlook for Charlotte's apartment industry should hold up, though, Whitaker said.

"The Charlotte market has a lot of good demand drivers, even though there’s a lot of new construction," he continued. "It should be well-positioned for the next five-plus years."