New JLL analysis of approximately 900,000 privately rented units across the UK and U.S. reveals rent collection in excess of 94.0 percent in both markets, with occupancy also remaining firm since the onset of the COVID-19 pandemic. Both fundamentals illustrate resident prioritization of rent payments and continued tenancy despite mounting hardships.

Offering income stability and capital-value resiliency through economic downturns, the multifamily sector is commonly regarded as a defensive asset class. Driven by a persistent need for housing and flexible lease terms, contractions tend to be shorter while periods of growth are prolonged. For these reasons, 84.0 percent of investors targeted the sector pre-COVID-19, according to our European Investor Survey.

The economic impact of the COVID-19 pandemic led to immediate consideration for tenants and their ability to pay rent. Encouragingly, multifamily operators have generally chosen to engage with their tenants and to allay concerns and fears during these unprecedented times. These actions have highlighted the service-based approach that many multifamily operators provide, in contrast to private landlords across both markets. 

JLL UK And U.S. Rent Collection and Occupancy Portal

In an effort to guide and inform owners and operators on the current state of the market, JLL Research on both sides of the Atlantic have partnered with nearly 50 firms, accounting for more than 900,000 units, to actively monitor rent collection and occupancy rates. The resounding participation by institutional groups in our rent collection effort underscores commitment to performance and investment in the asset class.

Key factors impacting multifamily performance

Government intervention has provided near-term stability to the broader economy, aiming to mitigate deeper negative impacts during the recovery period. Select stimulus packages and policies have supported renter finances and associated multifamily operator performance: 

• United States: the CARES Act bolstered unemployment benefits by $600 per week, often lifting incomes higher than historic earnings (due to expire at the end of July). Municipalities have broadly enacted temporary eviction moratoriums and rent freezes.
  
• United Kingdom: The Coronavirus Job Retention Scheme, puts employees on leave but allows them to stay on their company's payroll. The policy outlines that the UK Government pays 80.0 percent of furloughed employees’ salaries up to a maximum of £2,500 a month.In addition to government programs, property owners and managers are proactively working with tenants experiencing hardships, offering to defer rents or allow early move-outs without lease-break fees.
  

Multifamily performance amid widespread economic closure

Despite historic job losses and economic uncertainty, rent collections have remained strong during the first three full months of COVID-19 disruptions. UK operators captured 96.3 percent of rents, while the U.S. collected 93.9 percent of rents in June.

• In the United States, analysis demonstrates that premium product outperforms mid-range and affordable product. Such outperformance is largely attributed to a tenant base comprised of higher-income earners employed in industries experiencing more muted economic impacts. Additionally, affordable markets – commonly in the Southern U.S. – collect nearly 3.0 percent more, on average, than expensive gateways. Underperforming markets continue to be concentrated in entertainment hubs and high-cost gateways, while secondary and tech-centric markets lead rent collections.
  
• Interestingly, the story in the United Kingdom differs from the U.S., with the mid-range market segment posting higher collections to date. Limited variation has occurred from market-to-market, speaking to the overall stability of institutional assets nationwide. The most marked shift over the past month has come at the more affordable segment of the UK market, with rent collection increasing by 430bp at the end of June.
  
  

Source: JLL

Shifting occupancy rates also have a significant impact on investor operating incomes. Occupancy rates in both the UK and the U.S. have begun to deteriorate as financially distressed residents opt to move back in with family, or double-up in a shared apartment.  

• United Kingdom: a 100 bp fall in occupancy rates from March to April was common across operators. The tenant base of UK multifamily assets has a strong weighting towards university students and young professionals who may have alternative housing options such as living with family. While there was another drop from April to May, there has been a strong recovery in overall occupancy numbers, with an increase of 30 basis points totalling 95.9 percent for June. This recovery has provided landlords some assurance that tenants who remain in their portfolio, at least for the time being, have job and financial security and are able to meet their rent payments.
  
• United States: since early April, occupancy rates have declined 244 bps for premium, 77 bps for mid-range and 38 bps for affordable product. The drop in premium asset occupancy occurs as residents increasingly seek more affordable, spacious options in suburban submarkets. Additionally, properties recently completed are experiencing longer lease-up periods and widening concession packages. Concurrently, concession packages are more pronounced in urban submarkets than their suburban counterparts offering 1.3 percent more on average. 

How will the sector perform in the coming months?

The strong performance to date has been encouraging for both markets. However, as the financial stimulus packages in the UK and the U.S. begin to taper, there are clear concerns regarding the impact to performance for the remainder of the year.

Recent developments to the Furlough policy in the UK will mandate employers to pay a greater share of workers’ salaries. This tapering process will begin from 1^st August, as employers will be required to pay National Insurance and pension contributions for their staff. In September, employers will then pay 10.0 percent of employees' salaries - rising to 20.0 percent in October. Meanwhile, in the United States, the extra $600 per week employment benefit is set to expire in late July, reducing incomes and likely hurting low-income earners in a pronounced fashion.

Hobson’s Choice: rent or occupancy?

Despite this strong performance in H1 2020, it seems certain that investors and operators will face pressure on both rental rates and occupancy.

Entering the height of the leasing season, operators are unable to push rental rates and are often offering rent-free concession packages of two to eight weeks in the U.S. Additionally, an uptick in month-to-month lease agreements has maintained cash flow in the short-term, but leads to near-term uncertainty for operators. Similarly, In the UK, the third quarter is peak leasing season with 40.0 percent of existing tenancies due for renewal in these months. However, some doubts persist on whether students will return to universities and in what capacity – potentially further dampening PRS demand. As UK-based investors and operators will focus on maintaining high levels of occupancy rather than driving rents in the short term, we believe that many tenants renewing leases or seeking new living opportunities will attempt to negotiate rents. As such, JLL has adjusted our rental forecasts anticipating an average value decline of circa 2.0 percent across the UK in 2020.

The sector has performed well through the downturn so far and is expected to remain relatively resilient in the coming months. That said, performance of multifamily is dependent on the extent of economic fallout and recovery, particularly once support policies are withdrawn or tapered. JLL will continue to monitor and report on key metrics in the U.S., UK and other global markets. It is likely to be a rejuvenated interest from global investors to deploy capital in the sector as economies emerge from the crisis. 

Philip Wedge-Bernal – Associate, EMEA Living Research and Strategy