Three months into the coronavirus crisis in the United States, the extent of the damage to the U.S. economy is beginning to come into sharper focus. At the end of April, the Commerce Department revealed that GDP fell at a 4.8 percent annual rate in the first quarter, the first decline in four years and the worst drop since 2008.

Given the snowballing effects of layoffs and business closings so far this spring, things are expected to get significantly worse. The Congressional Budget Office (CBO) estimates that real GDP will contract sharply in the second quarter at an annual rate of just under 40 percent, the worst quarter since 1947. Although this sharp downturn will undoubtedly leave permanent scars, the CBO sees signs of partial recovery by the end of 2021. The agency predicts that unemployment will drop to 10.1 percent in the third quarter 2020 from a high of 16.0, and GDP for 2021 will reach 2.8 percent.

The Near-Term Outlook

Despite this barrage of dismal economic news, multifamily is holding up surprisingly well, especially in lower cost-of-living areas like the Southeast and South. In the immediate term, the combination of CARES Act unemployment benefits combined with state unemployment is sufficient to keep households afloat, at least through the end of July.

A Cushman & Wakefield analysis of markets throughout the South and Southeast shows that rents are slightly more than 33 percent of unemployment benefits in Atlanta, 31 percent in Charlotte, and 28 percent in Birmingham. CARES stimulus checks of $1200 per adult and $500 per child provide an additional cushion.

Time Will Tell

For multifamily investors, the moment of truth will come by mid-summer. As the recession goes on, state unemployment reserve pools will be under increasing strain, and many are already underfunded. U.S. Department of Labor statistics show that the unemployment trust fund solvency ratios of six of our largest states — California, New York, Texas, Illinois, Massachusetts, and Ohio — are below0.5. The Department of Labor views 1.0 as adequate. Together, these states represent 37 percent of the U.S. population.

The consequences will vary by region. Markets that have borne the brunt of the COVID-19 pandemic and are slowest to reopen may face a significant decline in rent collections. Cities that depend on such hard-hit industries like leisure travel, transportation, manufacturing, and energy face more substantial, lingering problems. In both instances, these markets may see an outflow of population as workers relocate for safety and job opportunities.

Many of the most affected markets (Houston, Las Vegas, Orlando) also have active construction pipelines. Under the circumstances, lease-up periods may be extended, and owners of currently stabilized assets might face considerable challenges maintaining occupancy at economically adequate rents.

Right now, the CBO sees GDP picking up in the third quarter at an annualized rate of 23.5 percent, making up some of the ground lost during the fourth quarter. If that projection holds, multifamily owners should have the breathing room they need to weather the worse of the crisis.

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