Experts anticipate an imminent recession, causing multifamily operators to once again ask themselves: How will leases get signed and paid while renters struggle to afford their basic needs?
Typically, a recession ensues when inflation tops 4% and unemployment drops below that number. Sure enough, inflation reached 9.06% in June, while the unemployment rate hovered at 3.6%.
So, if this trend continues, how would it impact rent prices? And what are the best ways for an operator to prepare for what’s to come? Let’s dive a little deeper.
Rents in a recession
Historically, recessions cause rents to rise while the market gets more competitive as households are priced out of homebuying. But that’s not always the case. Following the 2008 economic crisis, large multifamily properties saw a sharp 4.1% drop in rents in 2009 while vacancy rates climbed to a record 10.6%.
We must remember, however, that the Great Recession was unique. After all, its impact on the housing market was direct, as it was largely caused by the subprime mortgage crisis. Additionally, rent prices immediately recovered by 2.3% in 2010, and overall, the percentage of renters in the 50 largest U.S. metros rose from 36.1% in 2006 to 41.1% in 2014.
The current market
As for today, talk of a new recession is understandably unnerving. Renters and operators alike face seemingly more obstacles than ever.
Renters, for example, are navigating a market made ultra competitive by the low inventory and record-high prices in homebuying. And, as it stands, the median national rent ($2,016 in June, up 14% from $1,767 in 2021) is already just shy of 30% of the median national income ($79,900 in 2021 - or $6,658 per month).
This is coupled with COVID’s lingering effect on the economy. Recent Census data found that roughly 8.4 million households (15% of the total population of renters) were late on rent as of June 1 this year.
Meanwhile, owners know all too well the obstacles they’re up against. To name a few:
Renter’s Choice legislation, requiring owners to offer cash security deposit alternatives (see our section on Security Deposit Coverage below)
Laws in New York and Seattle that limit security deposits to one month’s rent
Nontraditional incomes are becoming increasingly common
Planning for a recession
So, what’s an operator to do with so much uncertainty? Prepare, prepare, prepare.
Here are our top 5 tips to insulate your bottom line against a looming recession:
Rent coverage
With rent coverage, requiring a guarantor no longer limits your renter pool. Also known as rent guarantee insurance, it protects against a loss of income if a resident doesn’t pay their rent.
Rent coverage includes:
Rent defaults
Lease breaks
Vacancy Loss
Holdover
With Lease Guarantee, TheGuarantors’ rent coverage product, some renter denials can even turn into approvals. Our advanced risk management technology helps operators open up their pool of applicants.
Security deposit coverage
Like rent coverage, security deposit coverage is a form of insurance.
As an alternative to paying their security deposit up front, renters purchase an insurance policy for anything a security deposit covers, including:
Damages
Utilities
Fees
Deposit coverage offers a win-win: You can advertise lower move-in costs as renters pay a fraction of your desired security deposit, but you’ll still get the same amount of protection from damages. And with more cash saved at signing, renters are more likely to pay their rent on time as the lease progresses.
Plus, in most states, our coverage is effective for the life of a tenancy, meaning renters only pay once, despite how long they stay in their rental home.
Renters insurance
Renter’s insurance protects operators against liabilities that could become major expenses. These include:
Stolen property, which landlords could have to reimburse tenants for
Accidental damage from, for example, a flooded bathroom or a kitchen fire
A costly injury to a guest in the home, for which a court could find an owner liable if the renter cannot cover the medical expenses
Temporary housing for a resident if a repair or maintenance is needed in the home
With renter’s insurance, not only are you protected from the cost of accidents and emergencies, but your residents are, too.
Structure leases strategically
The rental market is cyclical year to year. In a recession, it’s especially important to use this information to your advantage.
To avoid turnover during a long, cold, cash-strapped winter, structure your leases to end in the spring (ideally around the end of the school year). Consider extending them to 16 months, for example, to keep renters in place until the market picks back up.
Offer rent reductions and other incentives
Owners in competitive metro areas keep this trick in their back pockets to get leases signed: Incentives.
Incentives, also called concessions, are discounts and other deals that give renters a financial break for moving into one of your apartments. These can be:
A rent freeze, or assurance in the contract that rents won’t rise between the first and second year
The first month free or the first three months reduced
Free or discounted amenities, like WiFi, electricity, or heat
There are concessions for renewals, too. Consider offering renewal upgrades, like new kitchen appliances, or forgo rent increases for one year.
There’s no doubt that signs of a recession are unnerving. But if you plan accordingly and act now, you’ll enjoy peace of mind and financial stability regardless of what’s to come.