Since the first case of Covid-19 was confirmed on January 21, 2020, the ongoing crisis, now in its sixth month, has taken a significant toll on the economy.
Roughly 21 million Americans are unemployed and although May 2020's unemployment rate fell to 13.3% from 14.7% in April, the impact of the crisis could still take years to recover, says a report by the Kroll Bond Rating Agency.
The consequence for multifamily landlords, however, is that the many residents who are unemployed or underemployed will create cash flow pressure for building owners. Especially with certain state or local ordinances that prevent tenants from being evicted for the failure to pay rent or subject landlords to rent caps or freezes. The report summarizes these ordinances:
- Texas, California, Florida, and New York have some form of eviction protection extending through July and August.
- Texas only protects tenants in Section 8 housing and low-income tax properties as well as agency mortgages backed by the federal government.
- Texas and Florida do not have rent control.
- New York and California have rent control in certain cities including New York City and Los Angeles, respectively.
- California introduced rental reform in January 2020 including a statewide rent cap, which applies to units not already governed by rent control
Yet, in today's uncertain economic environment, the silver lining may be that renters will be more inclined to renew their leases rather than move. The downside to this for landlords, of course, is that further legislation could extend the moratoriums on eviction proceedings and it may be that tenants are making a calculated bet that they will not be forced out of their apartments.
Even if such legislation is not extended, such associations as the Real Estate Roundtable and the National Association of Multifamily Housing, have urged landlords to work with tenants during this difficult time. It also should be noted that rent at most properties have been paid on a relatively timely basis to date.
The KBRA report noted that even with the ongoing impact of COVID19 and the spike in the unemployment rate, the multifamily sector will be one of the better performing property classes in the current environment, as people still need a place to live. However, borrower defaults will continue to increase as landlords struggle to make their debt service payments.
The report also examined CMBS 2.0 and rated Freddie Mac K-Series deals to identify the locations where much of the securitized multifamily stock is located, and identified four states, each with an aggregate multifamily principal balance of greater than $10 billion, that accounted for approximately 40% of the total CMBS 2.0 and rated Freddie K Series multifamily universe.
The states include Texas ($20.8 billion), California ($19.7 billion), Florida ($12.2 billion), and New York ($11.7 billion). Two of the states, New York and California, which also include two of the most populous cities in the nation based on 2010 census data, passed sweeping rental reforms in 2019 and 2020 respectively.
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