South Florida multifamily was one of the healthiest real estate sectors but hasn't been spared by the coronavirus outbreak as newly unemployed workers can't pay their rent. This is expected to  push rents down possibly by as much as 6%, a drop not seen since the Great Recession.

The near-freeze in operations at hotels, stores and restaurants also has extended to transportation and warehouses serving airports, construction and cruise lines. This translated to a near-overnight spike in unemployment.

About 31% of U.S. apartment dwellers in 13.4 million units didn't pay this month's rent by the end of the grace period April 5, according to the National Multifamily Housing Council. This is up from 19 percent in March and 18% who didn't pay April last year.

Christos Costandinides, director of market analytics at CoStar Group in Miami, said the U.S. average likely reflects the nonpayment rate for South Florida.

"A large percentage of those are probably people who were sent home from work, and they are having difficulty paying rent," Costandinides said.

South Floridians already were burdened with the high cost of housing exacerbated by salary increases that didn't keep up with the rise in real estate values. The problem is particularly bad in Miami, which leads the nation with the highest rate of cost-burdened apartment dwellers. Nearly 63 percent are cost burdened by paying more than 30% of their income on house, and nearly a third pay over half of their income, according to Apartment List.

The coronavirus pandemic has exacerbated the issue, sparing neither tenants nor landlords.

Just ask Bob Powers, who owns a four-unit apartment building in Miami's historic Palm Grove neighborhood and lives in one of the units near Biscayne Boulevard and the Little River. One of his tenants didn't pay in April, which is significant for Powers.

"That's a third of my income," Powers said. "Right now there's nothing really to do. He is between a rock and hard place. He doesn't want to not pay the rent. It's not like, 'Oh great. We don't have to pay rent.' The thing here is that I don't know how we will handle it in the future."

Powers can hold out until June but by then fears more tenants won't be able to pay.

He has no mortgage on the property but pays property tax, insurance and city fire and business fees. So far, he has those covered and tried to apply for loans and grants offered by the U.S. Small Business Administration. But he said that's an extensive and confusing process.

He prefers to work with his tenants, reflecting the strategy many landlords are using since finding new tenants in the pandemic would be hard.

"Landlords know it's a problem across the market, so it's very different from when the market is working and they need to think about evicting someone," Costandinides said. "Here they know if they evict people," they won't find new tenants easily.

Rent Drop

Multifamily has been one of South Florida's strongest real estate types with high demand from a growing population that's largely priced out of buying a home.

More than 30,900 units across South Florida were in the pipeline in the first quarter, according to CoStar data. The 17,343 units underway in Miami-Dade County represent 10% of the inventory, which is much higher than the 3.6% U.S. average of units underway.

But nearly overnight, the outlook for new projects became bleak.

"It's going to be so much harder for new stock once it gets to market, once construction restarts,"  Costandinides said. "Let's say in the fourth quarter of the year and all those units under construction start delivering, it's going to take them longer to find tenants."

Before the pandemic, rent growth decelerated in part because of the high supply and regular rent increases. Rents now are in for a decline.

Miami-Dade rents fell 1% since mid-February and could drop 3-6% by the end of  June, according to Costandinides.

The recent drop, which he added is closer to 1.5% by now, is due to the coronavirus.

"It started dropping basically the day we shut the economy," he said, adding this was different from the slow drip of the Great Recession. "This time we flipped a switch. We went from one day being normal to the next day paralysis, Ice Age."

CoStar, which modeled its multifamily projections on economic forecasts by Oxford Economics, determined the most likely scenario is a 3% rent decrease in Miami-Dade but up to 6% if the pandemic lasts longer.

More damaging than units in the pipeline is that roughly 95% of them in South Florida are high-end apartments boasting amenity decks, yoga studios, pet grooming areas and pools, Costandinides said.

These could run more than $2,000 a month per unit, making them unlikely choices for stretched renters who will gravitate to the lower-end product in the $1,300s, he added.

"If you have uncertainty and people are trying to save money, automatically the cheaper apartments, the three-star and below, become more attractive," Costandinides said.

Powers foresees no rent drops at his units as they already are in the lower end at  $1,200-$1,500 for nearly 1,000 square feet in a quaint neighborhood.

Economy

Several economic models say the U.S. already is in a recession, but the bigger question is what kind of a downturn we will experience.

At first when many thought coronavirus would close businesses for only a short while, the hope was for a V-shaped downturn where the economy drastically goes down and then sharply climbs back up to pre-pandemic times. By now, this seems unlikely, Costandinides said.

The question now is whether we are in for a U-shaped downturn where the economic shutdown lasts for some time or the more pronounced L-shaped downturn with a prolonged recovery.

"Nobody knows what the future will be. When people sit down to draw those scenarios, they think about two things: the progression of the pandemic and how effective are the measures of the government in containing the economic damage," Costandinides said. "The government is helping with a bunch of programs, but market confidence is lost so you won't just go back up to where you were before. You are more looking at a U-shape. It might take you six months, or it might take you a year."