Three Principles for Forecasting Fall 2020

Much has been written about our industry's remarkably good performance since March, including several pieces of our own. The NMHC rent payment data has been particularly encouraging, with August 1st collections essentially on par with April through July numbers compared to last year.

We also see good news in the overall economic recovery pace despite an increase in reports around challenges with college campus openings and other event-driven spikes. At the time of this writing, the 7-day average of new cases is the lowest since early July (though still almost double April numbers). And STR reported last week that nationwide hotel occupancy is back up to 50% occupancy for the first time since March.

Why the Fall Remains Unpredictable

As we have written before, there is good reason for trepidation over what will happen September 1st...and again on October 1st. While our crystal ball is no less cloudy than anyone else's, it does seem clear that there are three key principles at play in any forecast for this fall:

1. Whether or not Congress acts in a material fashion
2. No matter what, seasonality will be a headwind
3. The wild card is the pandemic itself along with how good or bad a flu season we will have

First, let's talk about the wild card. The aforementioned decline in infection rates is certainly good news though we need at least an additional 80% reduction to get down to numbers anywhere near Europe. As for the flu, another piece of good news is that South Africa reported an almost non-existent flu season for their current winter, apparently driven by all of the COVID-19 mitigation efforts.

Seasonality has helped with this downturn, as pandemic has coincided with peak leasing season. As we move into September, that trend will turn naturally against us, although there is some hope that pent up demand may level out seasonality a bit. 

There may be some limited truth to that in bi-coastal CBD markets since they were more limited early in the pandemic. However, the well-reported general trend away from urban centers may offset that lift (at least until there is a vaccine). And color me a skeptic on this for any other markets, many of which have seen relatively strong YOY demand (though often at price reductions). So the notion that there's pent up demand seems driven more by hope than by data. In short, we expect at least normal seasonality patterns to emerge.

The single biggest single variable in the forecast is congressional action. There is a broad consensus that the relative success we have experienced (aka relative lack of any disasters) has been driven by the record bi-partisan $3 trillion support package at the start of the crisis. With Congress currently at an impasse on further stimulus, what could the future look like?

• If Congress agrees to a material stimulus, while we will still have seasonality to contend with, rent collections should stay stable, and eviction processes should slowly return to normal. In this case, we should be in a situation with "normal" recession rules (unless the agreement includes material additional eviction moratoria, though still subject to current federal rules w.r.t. any communities receiving mortgage forbearance) 
  
  
• If Congress fails to agree and we go into late September with no stimulus, we risk a much more challenging situation. Rent collections will likely drop off, with low-B and C-class disproportionately affected as job losses are directly correlated with income (in fact, jobs with pay over $32/hr are already back to pre-recession levels). With weekly initial unemployment claims back up over one million, there's a genuine risk that this scenario could turn into a "W" recovery with knock-on effects creating new unemployment at the higher end of the job market. The additional fear from the resulting uncertainty of no stimulus will have an outsized impact on overall demand, reducing rents and occupancy to levels never seen in any of our careers.

Remember, this is not like previous recessions

We have not yet had a "Lehman moment" as we had in the 2008-09 recession. While that recession started in December 2007, the market felt fine through the summer. It wasn't until the Lehman bankruptcy in September that everyone felt, and reacted to the reality of what was happening.

This recession is certainly different as everyone realized we had a problem by mid-March. However, the quick and record stimulus has thus far protected us from the worst, particularly at the higher end of the job market. We believe the market is still expecting a stimulus; after all, how can Congress not come to a deal, especially as they face voters in an election year.

We certainly hope that is will be the outcome (although "normal recession rules" will still be more painful in the upcoming low season than they were during the high season). If it becomes obvious that there will be no further material federal support this year, does that become this recession's "Lehman moment?"

In such a case, demand could easily be outpaced by supply. As we blogged last week, this creates a prisoner's dilemma scenario and a possible race to the bottom. Such a vicious cycle can cause demand to essentially freeze. In such a case, price actions won't stimulate demand as much as we'll need - a concern that we shared at the start of the pandemic. Fortunately, that proved premature in all but a small number of markets, but it doesn't mean it can't happen as part of a "W recession."

When demand drops that precipitously, there is no magic formula to avoid the pain, but we must mitigate it as much as possible. Our advice as we transition to fall and winter seasonality is to hope for the best, but plan for the worst. All multifamily operators need a plan for the fall that takes into account the uncertainties highlighted above. Do you have one?

Photo by Mark König on Unsplash