By Marissa Luck CoStar News
Apartment renters in California are proving to be something of a frustration when it comes to paying rent, according to a national apartment landlord.
Its tenants in California, where the unemployment rate is 14.9%, are more likely to struggle to pay rent, with many "ghosting" their landlords by cutting off all contact, executives at real estate investment trust Camden Property Trust told investors. California has regulations in place to prevent tenant evictions, a move that the apartment industry says has the unintended effect of providing a disincentive for some to pay who otherwise would.
“If you’re a resident in California and you listen to the mayor of L.A. or the governor, their messaging is, ‘don’t worry, you don’t have to pay,’ and the limitation of late fees, the limitation of [not] being able to evict somebody creates what we call ghosting, which is they just don’t show up,” Camden's CEO Ric Campo said in discussing the company's second-quarter earnings.
He added that some renters “know they don’t have any negative recourse; you’re not charging them interest or late fees and they know they can’t be evicted and so you just have this ghosting scenario that happens out there.”
The deferred rents, higher expenses and lack of payment reduced profits for Camden in the second quarter, which saw its net earnings fall almost 60 percent to $17 million from $43 million in the same quarter last year. Camden's challenges provide one look at the national apartment market as federal aid programs begin to run out and unemployment remains high.
The Houston-based developer and owner has a portfolio of 56,112 apartment units across 164 properties, offering a glimpse into multifamily markets in a variety of cities. The difficult quarter came after Camden launched a $10.4 million cash-grant renter relief program for struggling tenants and after Camden saw its lowest renter turnover rate in its history in the first quarter, with tenants not moving out.
Delinquency rates among Camden's renters in California are hovering at about 3.6%, said Alex Jessett, Camden’s chief financial officer, during the call. The national apartment REIT said it has about 4,200 apartment units across 12 properties in the Golden State.
Across its portfolio, Camden saw its delinquency rates hit about 1.2% in the second quarter, on par with the 1.4% seen during the same time last year. However, about 1.1% of tenants deferred rent or made some rental payment plan, while virtually no tenants deferred rent the same time last year.
Orange County in California had the lowest collection rates for rents, with Camden able to collect about 92% of its rental income in the second quarter, said CEO Ric Campo on the earnings call. Other cities nationally had rent collection rates between 95% to 98%..
There's a debate between the apartment industry, which says the tenant protections in California don't provide enough monthly revenue protections for landlords to collect enough money to be able to pay their own costs such as mortgages, and lawmakers, who say there's a societal need to prevent large numbers of evictions as they point to rent collection rates above 90% to argue that landlords are still collecting the majority of rent revenue.
Sun Belt Payments
Residents in Sun Belt states where unemployment is comparatively lower seemed to be better at paying rent on time, he said. Before the pandemic, California had been a bright spot for Camden’s growth, and company officials said they still think it’s a good long-term investment.
“I think California will always be a market that people want to be in. It’s one of the biggest economies in the world,” said Jessett. “To me, I know that there’s a lot of people piling on to California, New York and Seattle and some of these other markets. They’re not going away, there will be good, long-term markets and hopefully the pandemic moves through fast and we’ll get back to good growth.”
Even in the Sun Belt, some areas showed weakness in the apartment market, particularly in economically harder-hit areas such as Houston and southern Florida, Camden officials said.
Houston’s apartment market is facing challenges on multiple fronts. Beyond the double-whammy of the coronavirus pandemic and the oil industry downturn, Houston also is seeing a big wave of newly built apartment units hitting the market.
“Houston continues to be one of our weaker markets,” Campo said, adding that the downtown and midtown areas have some of the biggest challenges with too much supply.
Renters in southeast Florida also are struggling more than other markets, Camden officials said. After Orange County, the market that saw the lowest rental collection rates was Southern Florida, where rent collections were about 94%, said Keith Oden, executive chairman at Camden, in the earnings call. Florida’s unemployment rate has hit 13.7% as the hospitality industry took a major hit from the pandemic. Renters in this market seem slower to jump onto Camden’s virtual leasing and tours platform, Oden said.
Across its portfolio, Camden saw its renewal rates stay essentially flat in the second quarter compared to growing 5.7% in the same quarter last year. Its new lease rates dropped by 2.8% compared to growing 4% in the second quarter last year.
Overall, Camden saw expenses from the coronavirus pandemic sink its profits by 59% to $17 million last quarter, compared to $43 million during the same time last year. Its profits were dragged down by about $14.4 million in one-time coronavirus-related expenses, including the company’s contribution to its renter relief fund and employee assistance fund and one-time employee bonuses.
It also saw its property-related expenses rise by roughly 9% year-over-year. And property revenues dropped roughly 2% to $250.6 million in the second quarter, compared to about $255 million the same time last year.
On the development side, Camden has about $1.9 billion of new apartments representing 1,939 units in the construction pipeline. In Houston, it has started leasing up Camden Downtown I, a 271-unit, $132 million apartment project that is now about 24% leased, according to its earnings report.
It also recently started leasing up Camden Cypress Creek II, a 234-unit, $32 million apartment project it developed in a joint venture in the north Houston suburb. In the second quarter, Camden also recently completed construction a 441-unit, $98 million apartment project in Phoenix called Camden North End I, which is now about 89% leased.
Campo said he was optimistic about the prospects for America’s multifamily market, as demand for apartments is still strong despite the 11.1% national unemployment rate. Camden still has a relatively strong occupancy rate of 95% and its turnover rate is down somewhat from last year.
“Camden’s geographic and product diversification has continued to lower the volatility of our rents and occupancy. Camden’s Sun Belt market have fewer job losses than close to markets in the U.S. overall,” Campo told investors. “Our product mix that offers varying price points in urban and suburban locations continues to work for us."
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