14 May Apartment rents are falling. Where? How much? How long?
Although restrictions have started to ease, the impact of the coronavirus has hit the residential rental market hard and rents have already fallen by around 5% – 10%. But what areas are hardest hit, how far will they fall and how long will it take before they climb back up?
It is not just people losing their job or business income that has created the fall in rents. There has been a sharp spike in the supply of available apartments for rent from the follow areas.
1. Short stay apartments now being offered on the longer term rental market.
2. Hotels like Fraser Place Melbourne offering hotel rooms for longer term rental.
3. HomePooling – where several households are moving in together freeing up more apartments for lease.
… and then a drop in demand from new occupiers because
1. Tourism and events and travel have completely stopped.
2. Tertiary education and especially foreign students coming to Australia is on hold.
3. People including existing tenants are unwilling or unable to move homes.
4. Open for inspections
Consequently, areas that have a lot of short stay apartments and university students such as CBD’s and holiday locations have been the hardest hit. According to SQM research Melbourne CBD vacancy hit 7.6% and Southbank 13% with the exodus of tenants creating the largest one month rise in vacancy rates ever recorded.
SQM research also report that across all of Melbourne the total vacancy rate in Melbourne was 2.8% in April 2020 compared to 1.8% in April 2019 which represents about 6,000 additionally vacant homes.
At Wood Property the level of potential new tenants booking inspections has dropped from about 8 per property per day to 1 new enquiry per property every second day and tenants that are looking to move are “shopping” on price and quality. Also, existing tenants with an expired lease are negotiating a new lower rent or will move out to a cheaper or better apartment.
To understand how far will rents fall and when will they recover, we need to know how many more properties will come on to the rental market and how long the restrictions on travel, events, hospitality and education will last. Whilst we don’t know this definitively, we do know there is a natural occupancy base level. We also know groups like IMF (International Monetary Fund) have forecast Australia will see a sharp period of economic growth in 2021 similar to the size of the decline.
As travel and hospitality resumes later this year the rental market will start to tighten, and rents will start to rise.
Underlying all this is the well document forecast housing shortage that will start to bite harder than predicted in 2021 given the further slowdown caused by Covid-19 which will retard the already light pipeline of new apartment projects.
With restrictions now starting to easy and the road map out of Covid-19 becoming clearer I think rents have already bottomed out down 10% from pre Covid-19 levels. They will stay at that level for the next 6 months (Q2 and Q3 2020) before starting to climb back and recover in the normally busy Summer rental season from Q4 2020 to Q1 2021. The hardest hit areas will stay subdued for 12 months from now and won’t start to recover until mid 2021.
It will be more commonplace for apartments to take a few more weeks than usual to find a suitable tenant. But don’t just grab the first one that comes along. It’s more important than ever to scrutinise the tenants closely to get the best one and give you greater income security for what ever the next few years have install.