Covid-Era Back Rent Beginning To Flow For Apartment Landlords

After nearly four years, the country’s largest apartment owners are beginning to see revenue trickle in from units where renters were protected by pandemic-inspired moratoriums from evictions or rising rents.

Turning those small revenue streams back on helped multifamily-focused REITs tread water in an increasingly choppy sea, according to fourth-quarter earnings calls. Looming twin waves of loan maturities and construction deliveries have kept rent growth down in recent months, but the REITs eked out razor-thin margins over analysts’ expectations.

Small gains and a slow pace seem to be the name of the game as 2024 plays out, boosted slightly by companies’ restored ability to replace a nonpaying renter with a paying one or simply raise the rent.

“As we assess 2024, we expect to be relatively well positioned given the stable demand and limited supply outlook in our established regions but are forecasting a slower year of growth,” AvalonBay Communities CEO and President Ben Schall said during his company’s earnings call.

AvalonBay and its cohorts are seeing improvement in the amount of bad debt, or unpaid rent and overdue fees, they are carrying as evictions delayed by early pandemic renter protections make their way through the courts. The expiration of rules like those that limited rent increases have also contributed to the bottom line.

Although these renter protections ended months or even over a year ago in some cases, evictions can take time to finalize, delaying the financial impact for landlords. 

In Los Angeles, pandemic-related protections were among the strongest in the country and the last to end. The final phased deadline to pay back rent accumulated from 2020 through 2023 passed earlier this month. 

The number of legal evictions processed in county courts have risen considerably, with 43,000 processed in LA County through November. Full-year 2023 numbers aren’t yet available, but the LA Times reported that the number was expected to rise to 46,000, the most for any year since 2016.

The region was called out specifically by multiple executives in their earnings calls.

“We anticipate the improvement in LA-Orange County will come primarily from a reduction in bad debt as we repopulate many of our vacant units with residents who actually pay their rent,” Camden Property Trust President and Executive Vice Chairman Keith Oden told investors. 

Camden told investors it anticipates bad debt issues caused by nonpayment of rent will continue to be worked out throughout 2024, though the problem is anticipated to moderate as the year goes on. 

The REIT factored these collection and fraud issues into its projections for the year, anticipating rental income growth of 1.5%.

Camden reported net funds from operation of $1.73 per share, narrowly beating analyst expectations. Zacks estimated Camden’s quarterly FFO at $1.72 per share. Other multifamily REITs performed similarly: Essex reported FFO of $3.83 per share, 2 cents higher than Zacks’ estimate, while AvalonBay was a penny higher than expected with an FFO of $2.74.

Equity Residential's bad debt as a percentage of same-store revenue was down from “well over 2%” to just under 1.5% by the end of the year, Executive Vice President and Chief Financial Officer Robert Garechana told investors. 

Equity Residential’s guidance for the year assumes the issue won’t be completely resolved in 2024 and instead pegs the year as “another transition year for bad debt” instead of a return to pre-pandemic levels, Garechana said. 

AvalonBay is anticipating an approximately 60-basis-point improvement in its underlying bad debt from residents in 2024 from last year’s 2.4%. If that occurs, it would put residents’ rate of bad debt at “more than double our historical pre-Covid rate,” AvalonBay Chief Operating Officer Sean Breslin told investors. 

This year, AvalonBay’s Southern California properties are expected to produce the strongest same-store revenue growth of any market where the company operates, largely the result of a “substantial improvement” in underlying bad debt year-over-year, Breslin said. 

Multifamily owners face a record addition to the supply of new product in 2024, with those holding high concentrations of property in Sun Belt markets facing the biggest crush of new units.

The East Coast markets outperforming the West Coast was a theme for 2023 and is expected to continue this year, Equity Residential Executive Vice President and Chief Operating Officer Michael Manelis said. A significant portion of Equity Residential’s net operating income comes from coastal markets. In the markets where it has most of its properties, there is a “mostly positive supply situation” working in the company’s favor, he said. 

MAA executives said that in many of its markets, new deliveries continue to be a hurdle. Although it expects that new supply will keep a thumb on pricing for most of the coming year, its view is that the worst is already over.

“I think that we're in the sort of peak of the storm from a supply perspective,” MAA CEO Eric Bolton said.

“It's hard to peg it by month, but we do think that there are a lot of reasons to believe that supply starts to peter out or starts to moderate a little bit,” especially toward the end of 2024, he said.