COVID-19: Outlook for Virginia’s Economy and Rental Market
May 26, 2020
There are nearly 3 million renters in Virginia, and the COVID-19 pandemic has created major challenges for many renters and property managers across the Commonwealth. Several trends have impacted the rental housing market and property management industry over the last few years. COVID-19, and the public- and private-sector responses to the pandemic, will further reshape the rental housing landscape.
There have been significant job losses in Virginia and across the country, and economists predict that the economic recession will get worse in the 2nd quarter of 2020 before improving in the 3rd and 4th quarters. While the Virginia economy has been impacted by the downturn, economic conditions were strong going into the COVID-19 pandemic, and the State’s economy should recovery more quickly than many other places across the country.
The rental market has been more adversely impacted than the for-sale market during the COVID-19 pandemic and economic recession. Renters have been more likely than homeowners to face job and income loss. Landlords and property managers have had to work with tenants who are having difficulties paying rent. And while mortgage relief has been made available to homeowners and rental property owners as part of the federal COVID-19 response, there has been no systematic assistance to property managers who may face significant income losses.
At the same time COVID-19 is impacting the rental market, demographic and other economic shifts have had a big impact on the ways in which property managers do business.
Recent Trends in the Rental Housing Market
Before COVID-19, there were several key trends impacting the rental market both nationally and in Virginia.
- Rise of investor-owners in the single-family rental market. While the single-family rental (SFR) market remains dominated by “mom and pop” landlords, there was growing interest in this segment of the market from large-scale investors following the 2008 recession. Policies designed to help mitigate the impacts of the foreclosure crisis created incentives for investors to purchase single-family homes and convert them into rentals. As a result, single-family homes were the fastest growing type of rental housing over the past decade. Even though large investors have entered this market, small-scale investors—those owning fewer than 10 units—remain the largest part of the SFR market.
- Changing demographics of the renter population. Since the 2008 recession, the demographic characteristics of the renter population have changed substantially. These demographic changes have led to demand for different types of rental housing.
- Since the last recession, more families with children have become renters. Many of these families became “renters by necessity”, either because they lost a home due to foreclosure or because they live in an area where homeownership became prohibitively expensive. Families are more likely than more “traditional” renters to be looking for single-family rental homes in suburban neighborhoods.
- The aging of the population has created increased rental demand from seniors, as well as persons with disabilities. Some Baby Boomers have downsized into rental units to have a more carefree living environment or to be closer to amenities. The rental housing needs have been substantial and growing for lower-income seniors and persons with disabilities who live on fixed incomes and need rental homes with accessibility features.
- The renter population has become more highly-educated over the past decade, mostly driven by the aging of the Millennial population into their early- to -mid-20s. Millennials have been more likely to go to college than prior generations, but they have also been more likely to delay marriage and having children. As a result, these young adults have been remaining renters longer. In some urban areas where Millennial have flocked, there has been a rise in the demand for “micro” units, or apartments that include very small private living spaces and more communal amenities, often located near amenities, services, and public transportation.
- Growing housing affordability challenges. Over the past few years, before COVID-19, rents were rising faster than incomes. As a result, housing affordability became a major issue in some markets. Insufficient new construction has been a driver of affordability in some markets, but in other places, slow-growing wages have been the biggest challenge.
In the short-term and mid-term, during this current economic downturn, housing affordability will continue to be a growing problem for a set of renters who have been impacted by job and income losses. During the recovery, rent growth may moderate, but until jobs return, there will still be a segment of the renter population that is going to have difficulties paying rent.
- Renewed interest in rent control (and rent freezes). In 2019, in a (some would say, misguided) effort to address growing housing affordability challenges, Oregon and California passed legislation that instituted rent caps. While not formal “rent control” that is in place for some buildings in New York City, the rent cap or rent stabilization programs were designed to limit rent increases in these high-cost places.
While rent stabilization is not on the table in any serious way in Virginia, there are growing concerns about not only housing affordability, but also housing stability and evictions. The COVID-19 pandemic has renewed conversations about the process of evictions and how public policy—often oriented towards tenants rather than property owners—could reduce evictions. These policy discussions will likely be on-going throughout and after the COVID-19 outbreak.
What is the Outlook for Virginia’s Rental Market Post-COVID?
The unprecedented worldwide public health crisis has led to this economic downturn, with millions of people out of work and a drastic slowdown in economic growth. We will come out of this, likely seeing a return to economic growth in Q3 and Q4, though there is a risk that the return of the coronavirus in the fall could create a setback in the economy.
Some of the potential outcomes for the rental market here in Virginia and for property managers include the following:
- In the short-term, there are going to be renters who are not able to pay rent. However, the number of tenants not paying rent could be lower than we might have anticipated. According to the National Multifamily Housing Council’s Rent Tracker, more than 80% of tenants paid rent in April and May, only slightly lower than the shares we would see in a typical year. This Rent Tracker disproportionately includes large-scale properties, with less information from smaller property managers and landlords. According to Virginia REALTORS® survey, about 35% of landlords and property managers dealt with tenants not paying rent in April.
- Rent could moderate slightly in 2020. Rents have been rising steadily for years in most markets in Virginia, but there could be a slow down in rent growth as a result of the COVID-19 stay-at-home orders and job losses. In addition, a trend that had begun before COVID was the over-saturation in some markets of luxury rental housing, which could lead to downward pressure on rents in some high-cost urban markets in the state over the next few months.
- Short-term rentals converted to long-term rentals or homeownership. COVID-19 has led to a near-stop of vacations and other non-essential travel. Owners of short-term rental properties have seen their business take a hit. As a result, it is possible that some of these property owners could decide to get out of the short-term rental game and either lease their properties as standard rental properties or decide to list the property on the for-sale market.
- Growth in the rent-to-own market. Rent-to-own properties are not common, but in some places, property owners have worked with tenants to establish a plan for allowing individuals and families to put some of their monthly rent payment towards the eventual purchase of the home. More recently, since COVID, some large-scale developers have built new homes expressly meant for a rent-to-own occupant. This new model of homeownership could become more attractive to individuals who suffered an economic set-back as a result of COVID-19.
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