The COVID-19 pandemic has sent unprecedented ripples through the world economy. Already, the stock market has crashed, oil prices went negative, and the unemployment rate shot up more than it did in the Great Depression— and we’re still at least 18 months from a vaccine.
But few financial sectors have been hit as hard as the rental economy. Many tenants, having lost their jobs, had trouble paying rent in April, and are projected to have even more difficulty paying it in May. Although they’re protected from homelessness by the federal eviction moratorium spelled out in the CARES Act, many tenants have called for a rent freeze; in NYC, many tenants are planning on withholding rent in May to force government action. How would this wave of nonpayment affect landlords, many of whom have their own mortgages to pay?
A new study by Clever Real Estate surveyed renters and homeowners and made some interesting discoveries about their financial preparedness and how they might handle the pandemic’s economic fallout. Let’s break down their findings, look at some of the ramifications for both tenants and landlords, and review some of the new options available for tenants and landlords who are facing financial adversity.
Tenants Are in a Tough Spot
The Clever survey found that, overall, 73% of renters are paying their rent as normal. Of the remaining 27% of tenants, 13% have stopped paying rent, and 3% have already left their unit. The remaining 11% have made arrangements with their landlord for lower or deferred payments.
The longer the economy is stalled, and as more tenants exhaust their savings, the worse those numbers are going to get. But non-paying tenants are protected from eviction— for a while.
The recently-passed CARES Act included a federal eviction moratorium of 120 days that began on March 27, though this eviction moratorium applies only to properties that have federally backed mortgage loans, and certain types of government rentals.
And when the moratorium is up, the landlord has to give at least thirty days notice for an eviction. Essentially, this means non-paying tenants have five months of breathing room.
Many tenant advocates say the eviction moratorium doesn’t provide enough relief to tenants, pointing out that tenants will still be responsible for back rent once the eviction moratorium is lifted, and that a massive wave of evictions could result. In New York City, groups of tenants— and some entire buildings— are planning a full rent strike on May 1, to force the government to intervene with a rent holiday, or at least a rent freeze. Tenants have made similar rent freeze demands in Missouri and Colorado.
Could We See a Rent Freeze?
So what are the chances of a rent freeze? If rent freezes did happen, they would most likely roll out on a state-by-state basis. But the legalities of a true rent freeze— which means tenants wouldn’t have to pay their rent, nor would they accrue back rent— are murky.
In New York, the epicenter of the U.S. pandemic, the governor has consistently refused to consider a rent freeze bill that’s supported by the state legislature. On the other hand, in Colorado, the Denver City Council has formally called on the governor to initiate a full rent freeze, and legal experts have said that it falls within his powers; the state emergency statute that the governor called on to initiate the coronavirus lockdown gives him broad powers to “commandeer or utilize any private property … necessary to cope with the disaster emergency.”
In theory, at least, the definition of private property would include the contracts governing rents. But a close reading of that statute reveals why governors have been reluctant to use those powers; they amount to eminent domain, i.e. government seizure of private property.
Why Are Renters So Vulnerable?
The Clever study found that renters were significantly more vulnerable to financial stress than homeowners for one simple reason: they have far fewer savings to fall back on.
Financial experts suggest setting enough money aside to pay your normal expenses for three to six months. Data from the Bureau of Labor Statistics reveal that the average renter spends just over $3,650 a month, meaning that a sensible amount of savings would be between $11,000 and $22,000.
But almost half of all renters (46%) had less than $500 in savings; only 13% had $10,000 or more saved up. Even worse, 70% said they wouldn’t be able to survive more than two months without income, and of those respondents, 49% had already exhausted their savings at the time of the survey. If the lockdown drags on, it could get ugly fast.
What About Investors and Landlords?
The future is almost as dim for landlords. In a recent New York Times article, an affordable housing provider in the Midwest said they expected up to 40% of their tenants to fall behind on their rent. In southern California, where the spread of COVID-19 has been slower, only about 10% of tenants failed to pay their rent in April, but many landlords were bracing for a rough summer as unemployed tenants exhausted their savings.
Right now, landlords aren’t feeling too much pain. The National Multifamily Housing Council released a report this week that surveyed 11.5 million apartment holders and found that, nationally, non-payment of rent had only increased by about 6-7%, falling to 84% from a typical 90-91%. But with the eviction moratorium already in place, and tenants around the country calling for a rent freeze, many landlords are stuck between a rock and a hard place, with no government relief yet, less rent coming in, and an explosion of non-payment on the horizon.
So what, exactly, do the new regulations cover? The CARES Act explicitly forbids evictions of tenants in properties with federally backed mortgages; it also forbids charging late fees or interest on unpaid rent.
However, it only bars evictions for non-payment of rent; if a tenant breaks the terms of the rental contract, the landlord can still file for eviction, assuming no local moratorium bars all evictions.
Also worth noting; tenants who rent in properties that aren’t under federally backed mortgages are not protected by the eviction moratorium. If a landlord isn’t sure if their property has a federally-backed mortgage, there are many resources to consult, from Fannie Mae and Freddie Mac databases, to closing documents and account statements. Any landlord proceeding with an eviction for a reason other than non-payment of rent should be careful to provide documents proving their property doesn’t fall under the conditions of the CARES Act’s moratorium, or their filing could be delayed or dismissed.
Rent Freeze for Tenants, But What About Landlords?
The plight of landlords hasn’t received as much press as the tenants’, but it’s just as serious. Many small to mid-sized landlords had little in cash reserves and relied on a steady flow of rent to pay mortgages; with rents drying up, they could be looking at foreclosure.
Holders of federally-backed mortgages do have some options, though. Freddie Mac and Fannie Mae recently began allowing landlords to stop paying their mortgage, without being charged late fees or penalties. The only catch? They can’t evict their tenants, and must allow them up to a year to pay their back rent.
But the dearth of relief options aimed at landlords means that many of them will have to get creative. One way for commercial landlords to protect their bottom line is to assist their small business tenants in getting Paycheck Protection Program (PPP) loans. These loans can be used for expenses, including rent, so landlords will benefit indirectly from tenants’ loans. (And keep in mind that if a landlord has employees, and has experienced significant financial losses stemming from the pandemic, they may qualify directly for a PPP loan.)
Another relief option for landlords is the SBA’s Economic Injury Disaster Loan, which was enhanced by the CARES Act. This loan is for up to $2 million, capped at 3.75% interest, and for a term up to 30 years— and the CARES Act added an immediate advance of $10,000, to be disbursed within three days of the request, that doesn’t have to be repaid even if the landlord’s loan application is denied. The law allows this money to be used for everything from mortgage payments to employee payroll, so it represents a quick, easy infusion of free cash for eligible applicants.
Many Landlords Could Sell
So what other forms of financial relief can landlords expect? Many are calling for a universal suspension of payments— rent relief for tenants, and mortgage relief for landlords. Still, some landlords will probably be left out of whatever solutions, if any, pass Congress. Rental calculators suggest many real estate investors hold properties with thin margins, where they need a constant flow of rent with low vacancy rates.
One think tank that advocates rent relief for residential and commercial tenants is against relief for property owners, because the government shouldn’t protect investors from declines in their investment. (They suggest loans, not grants.) The consensus in government seems to follow similar logic. This presents a lopsided and arguably unfair possibility; that tenants will receive rent relief, but landlords may only receive a federally-backed credit line. Still, for small landlords looking at dwindling rents, it may be better than nothing.
If the lockdown continues for months, many landlords and property owners may be forced to sell. This wave of sales would likely accelerate trends already reshaping the real estate industry, as thrift-minded sellers turned to discount real estate services like reduced fee MLS companies or discount brokerages to sell their properties and keep as much of the proceeds as possible in their pocket. That 6% commission that seemed inconsequential when the market was booming can seem pretty big in tough times.