In September 2020, the Trump administration announced a halt on eviction proceedings targeting residential renters. This was in response to the Centers for Disease Control and Prevention’s (CDC) concern that homelessness from eviction could further spread of SARS-CoV-2, better known as COVID-19.
In the year since the moratorium has gone into effect, two questions arise. First, whether the moratorium actually served its purpose when it came to helping renters. And second, how this halt on evictions for non-payment impacted multifamily owners and operators.
The answers? “Kind of,” and “it’s a mixed bag.”
A History Refresher
During 2020, SARS-CoV-2 spread rapidly, leading to government-mandated quarantines, stay-at-home orders, and required social distancing and masking. The economic response was a large increase in U.S. jobless rates. This, in turn, led to concerns that renter households might not be able to make their monthly rent payments.
On Sept. 4, 2020, the CDC and the Department of Health and Human Services (HHS) issued a “Temporary Halt in Residential Evictions to Prevent the Further Spread of COVID-19.” Introduced as a way to help ensure housing stability during a highly contagious pandemic event, the moratorium indicated that owners and property managers “with a legal right to pursue eviction . . . shall not evict any covered person . . .” The edict made it clear that renters still were obligated to pay their rent, nor did it indicate that landlords stop charging fees, penalties or interest resulting from failure to pay rent. It simply stated that landlords couldn’t evict tenants because they decided not to, or were unable to, pay rent.
The CDC ban was supposed to last four months. However, extensions stretched it out; as of now, the moratorium on evictions has expired, following a late August ruling by the U.S. Supreme Court that struck it down.
Who Really Owns the Majority of Multifamily in the U.S.?
Much of the problem with the moratorium and other government-supported renter alleviation plans lies in the way that rental housing is perceived. “The presumption is that multifamily properties are owned by big institutional buyers, which can tolerate missing a few payments here and there,” said Douglas M. Bibby, president of the National Multifamily Housing Council (NMHC). “But the vast majority are smaller mom-and-pop operations. They rely on that property for retirement and income.”
NMHC statistics bear this out. In 2020, 66% of all multifamily properties were owned by individual investors; LLPs, LLCs, and general partnerships owned 21% of the stock. Breaking this down into units, 24% of investors owned all units in the United States, while partnerships and limited liability corporations had possession of 53% of all U.S. units. Perhaps unsurprisingly, the individual investors owned the bulk of the smaller properties (72% owned two- to four-unit properties) while the LLCs and partnerships owned the most units in larger buildings.
“The professionally managed apartment owners have an army of lawyers, they run credit checks and tend to rent mainly to financially well-qualified people,” said real estate economist KC Sanjay, founder and president of KC CRE Advisors. He added that renters in these facilities are more likely to pay, as they “are scared to death of any ding on their credit report.” As such, it’s the smaller owners that are getting hurt.
And, as noted above, there are a lot of these small, private owners. Getting back to numbers, the National Association of Realtors reports that 48% of rental units are in residential buildings with one to four units. And most of these are owned and managed by individuals. These owners operate on very thin margins to begin with; they rely on rental income to pay taxes and expenses for the property. Not being able to evict for non-payment means these owners and operators have had to carry the load, even when tenants don’t pay.
But has eviction protection been helpful for renters? According to Ray Perryman, real estate economist and president and CEO of The Perryman Group, kind of.
“In the early days of the pandemic, the eviction moratorium was needed, and helped to minimize the human tragedy of the virus. It is not, however, a sustainable approach, and is contrary to how market economies work in normal times,” he said.
And nowhere in the moratorium did the CDC or federal government indicate that rent should never be paid. “The moratorium enabled people not to have to fear eviction but at the same time, saddled them with months of rent debt they have to eventually pay off,” said Greg Brown, the National Apartment Association’s SVP of government affairs. “It isn’t cancelation or suspension. It’s putting off the inevitable.”
“In the early days of the pandemic, the eviction moratorium was needed, and helped to minimize the human tragedy of the virus. It is not, however, a sustainable approach.”Ray Perryman, The Perryman Group
Federal Versus State Moratoriums
Then there was the fact that, in many cases, state moratorium evictions had more “teeth” than the federal counterpart. “[The federal moratorium] was pretty broad and vague,” said Peter McKenzie, CEO and owner of Rincon Property Management, a multifamily residential property management company in Ventura County, California.
The California regulations, however, were not. “The state’s moratorium was specific on what you could and could not charge – you couldn’t charge late fees – and was specific on what happens to the unpaid rental debt,” McKenzie said. Additionally, the state moratorium converted unpaid rental debt into consumer debt. “That’s more difficult to collect,” McKenzie observed.
Looking eastward, Dean Hunter, broker-associate with the KW Commercial Division of Keller Williams Realty of Manatee and CEO of the Small Multifamily Owners Association, indicated that Washington, D.C. had one of the most extreme and expensive renter-protection rules in the U.S. “You could not evict a tenant for any reason,” he said, indicating that some of the rules were in place pre-COVID. “You couldn’t evict, and you could not send demand letters.” The eviction moratorium was so extreme, he continued, “that landlords could not even evict for health and safety violations.”
On the other side of the coin, investment firm Casoro Group, which develops and invests in apartments in Texas, hasn’t been impacted quite as badly, primarily due to rental assistance programs. “In Texas, the relief programs have been successful,” said Melissa Oliver, president of CLEAR Property Management, a privately held subsidiary of Casoro Group. “I’m honestly proud of how quickly it was put into place and rolled out across the state.”
Emergency Rental Assistance
Olivery’s comments bring up another point, namely, the COVID-19 Emergency Rental Assistance program. This program was put into place to help households unable to pay their rent. ERA1, which provided up to $25 billion under the Consolidated Appropriations Act 2021, was enacted on Dec. 27, 2020. ERA2 followed; authorized under the American Rescue Plan Act of 2021, this put $21.5 billion more toward household renters and landlords.
The idea had been to funnel the money into state, local and tribal governments, which would then distribute the funds, at their discretion, to renters. But the funds have been slow to trickle down to those who need it. Some states, such as Texas, have done a fair job of distribution. Others? Not so much.
“Relief funds for residents and landlords have unfortunately been caught up in politics,” Bibby observed. “There have been barriers in moving the money forward; it’s been horribly mismanaged at the state and local levels.”
One such problem is that state and local governments were not really prepared to handle monies for rental assistance, which led to delays. And while landlords can apply for relief on behalf of their tenants, tenant consent is required to do so. “There are thousands of applications pending, with all “I’s” dotted and “T’s” crossed, but the one thing missing is consent required from the tenant to move forward,” Brown noted. “Without that, applications don’t get approved, and nothing gets settled.”
Finally, there hasn’t been any guarantee that tenants will hand over relief funds to landlords. “There are cases of renters getting assistance and still not paying their rent,” McKenzie said, adding that one workaround is to direct funds to the landlords. “California does have a provision that the money will go to the landlord, as long as the landlord follows certain rules,” McKenzie said.
Meanwhile, in DC, Hunter noted that 60% of tenants who are behind on their rent haven’t applied for assistance. “There is more money available than there are delinquent tenants,” he said.
The Multifamily Impact – Revenue, NOI and Occupancy
SMOA’s Hunter and Rincon’s McKenzie said that the moratorium has changed how smaller multifamily owners and managers can do business. Hunter pointed out that, without a flow of rental income, owners are on the hook for operational costs and expenses.
Added McKenzie: “It’s similar to if you go to a grocery store, put your items in a basket, and then go to the checkout line. But then you tell the cashier that there is a grocery moratorium, you don’t need to pay, then you walk out the door with your groceries. This is what the government is saying. It’s interfering with how landlords and managers can earn a living.”
And, in truth, there are questions as to whether the moratorium was actually necessary. Bibby pointed out that, from April 2020 to July 2021, 95% of rental residents paid their full rent, on time. “The percentage of people who were seriously in arrears was quite small,” he commented.
On the local level, McKenzie said that approximately 96% of tenants in Rincon-managed properties have paid rent, in full, each month. “For those who did have COVID hardships, we are able to work out repayment plans,” he added.
CLEAR Property’s Olivery agreed, indicating that, for the most part, Casoro was able to work directly with struggling tenants. But the moratorium might have created some issues that could have been avoided.
A few Casoro residents haven’t paid their rent in more than a year because of the moratorium, “and we believe they have no intention of doing so, due to our communication with them,” Olivery said. This, in turn, meant that “in some cases we have had prospects looking for homes, that we have had to turn away, due to little or no availability, resulting from nonpaying residents.”
From an economic point of view, this was a problem. Sanjay said that, while the moratorium promised the multifamily owners would get their back rent, he believes that they’ll have a hard time collecting. Added Perryman: “The criteria for avoiding eviction were very loose, and naturally there were problems of people seeing no reason to even try to pay rent when they knew they wouldn’t be evicted. This set off a variety of unintended negative consequences.”
Furthermore, though the moratorium did bring housing affordability to the forefront, both economists expressed concern about increasing rents, due stunted supply and pandemic-related construction halts. “Now, as people return to work in cities and demand rises, so are rents,” Perryman said.
“There have been barriers in moving the money forward; it’s been horribly mismanaged at the state and local levels.”Douglas M. Bibby, National Multifamily Housing Council
A Better Way?
Many of the experts agree that one better is for landlords and tenants to just talk. Talking can lead to working out problems, directly.
“Some people did struggle, but in our experience, most of our landlords were willing to work with tenants and come up with solutions,” Rincon’s McKenzie said.
Olivery agreed, noting that Casoro helped tenants apply for relief. “This has been very successful for us and has helped resident retention and our renewal rate remain strong,” she said.
But while tenant-landlord interaction has been helpful, there continues to be a perception problem.
“Part of the challenge right now is that it’s a cultural norm to demonize the housing providers and landlords,” the NAA’s Brown observed. “Many have pushed the narrative that the housing provider is the bad guy in this scenario. This foments distrust and gives license to residents not to talk to their landlords.”
Hunter agreed, saying that he’s had anecdotal reports about small-property landlords being assaulted and spat upon. “We’ve heard stories of providers that had to move out of duplexes they own and live in, because the tenants ran them out,” he said.
Hunter went on to say that placing financial assistance directly in the hands of landlords could have avoided a variety of issues. McKenzie concurred, adding that “the (ERA) programs didn’t come out right away, and the landlords were left holding the bag. The government could have recognized that and put relief toward those owners.”
The NMHC’s Bibby went one step further, suggesting that the ERA funds directed to states and municipalities should have, instead, been directed to state housing finance agencies. “Congress should have mandated that the ERA funds go through the state HFAs,” he added.
In short, very few in the apartment industry wanted to kick out renters who were hampered by COVID-19. “As small landlords, we never opposed the CDC moratorium,” Hunter said. “We didn’t want to see anyone evicted due to COVID.” What concerns Hunters and others, however, was the short-sighted approach to protecting tenants, at the expense of owners and managers, especially the mom-and-pop landlords and operators. “Bills are still due,” Hunter pointed out. “Utility prices continue going up, common area fees are due. And in many cases, the revenue isn’t coming in.”
So, while the CDC moratorium was a fair short-term solution, it led to some longer-term issues.
“The moratorium was a lifeline for many renters,” Perryman said. “If it could have been more targeted, it clearly would have been better.”
For a high-level discussion of the regulatory and macroeconomic trends affecting multifamily, watch below for Connect CRE’s latest webinar, “Buy, Build, Sell, Hold or Trade Apartments.”