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Is the Rental Market Poised for a Crisis?

Is the Rental Market Poised for a Crisis

What is the future of the rental market?

From our perspective, we’re still investing in single-family residential and small multi-family apartment buildings. We’re focused on workforce housing and reducing short-term distress. Ultimately, we’re very bullish on the long-term fundamentals of today’s rental market. 

The pandemic has fueled the demand for workforce housing throughout the nation. Most investors anticipate that this trend will continue well beyond the pandemic. A recent survey from the rental management platform, Avail, and Urban, found that renters in smaller multi-family buildings struggled to pay rent more than renters in large corporate-owned multi-family complexes. 

Missed rent payments are also translating into distress for small landlords. Many of whom are struggling to pay mortgages and property taxes. The survey found that many small landlords are increasingly feeling the pressure to sell their properties. 

So, you have the existing landlord, the tenant, and then you have the investor that’s going to buy this discounted property from the existing landlord. First off, let’s talk about the investor. Like other investors, we see the current climate as an opportunity, now and in the future. But, this opportunity depends on the stimulus package. 

If there’s stimulus money given to tenants, it may help them pay their rent. This means they’re paying rent and taking some of the pressure off of the landlords. At this point, we still can’t predict the effects of this stimulus money in the long term. 

Secondly, we don’t know what’s happening with the tenants. They don’t pay rent, and they’re not being evicted because of the eviction moratorium. However, it does affect their credit, and they will owe back rent which could tarnish their record with a judgment in the future. 

That’s a problem, because eventually when the eviction moratorium comes to end, what’s happening to them? This can cause problems when they’re trying to find a place to rent down the line. If the tenants have bad credit, they’re going to be forced to put up a larger security deposit or pay more rent upfront. Eventually, the existing landlord will have to sell to an investor if the tenant isn’t able to follow through. However, there may be a solution to this problem. 

The eviction moratorium has been one of the key parts of the rental market this year. The prolonged eviction ban suppresses the wound for the time being but doesn’t cure the wound completely. In a way, this ends up creating a vicious cycle. 

There seems to be no easy way out of inevitable financial distress, but with the GRACE act, we may have a viable solution to the financial predicaments we’re facing right now. Proposed by Georgetown University Professor, James Angel, to address large-scale financial issues, he discussed this potential solution.

Under this act, the debtor will be able to defer rent payments and avoid eviction. Debtors are still required to repay the deferred payments over extended periods, more or less 6 months. Then, the creditor or landlord can sell the receivable, or use it as collateral for a US government-backed nonrecourse loan, so they can pay their bills. 

Also, to incentivize banks to make loans, they’ll be permitted to carry a zero risk weight when they calculate risk-weighted assets and total average ratio, which is not detrimental to their capital requirements. So, this loan will be counted as a high-quality liquid asset. 

Another component we need to think about is the damage to borrowers’ credit. To avoid the long-term impairment to their credit, this act suggests that the deferred payments be reported as a pass on credit reports, so the lenders won’t deny credit based on the borrower’s use of the deferral. 

This could help to sever the multiple chain reactions that are about to occur. Amazingly, the financial burden to the taxpayers as a whole will be far less impactful than overarching stimulus packages pose. At the end of the day, taxpayers are only responsible for the actual credit losses, instead of the entire deferred payments. Therefore, this GRACE act program is more cost-effective than the CARES act, which has already spent a trillion dollars. 

In our opinion, this GRACE act is expected to bring about many wins for varying stakeholders such as borrowers, creditors, taxpayers, and the US economy as a whole. 

How does this crisis end? And how do you see this playing out? We believe this is a renters nation, and there is going to be more demand for rentals and workforce housing. There’s a shortage in that area, and we’re going to see increased demand as people downsize to workforce housing.

Developers are building more, but the demand still outweighs available inventory. Short-term distress may be an issue, but different programs coming into play may help renters pay, and ultimately, protect smaller landlords. Investors looking for discounts may not have the opportunities they were hoping for. 

We can see that opportunistic investors are already preparing to buy discount properties. With tenants, we do expect a generous stimulus plan coming that will buoy them temporarily. Maybe that plan will help tenants pay. But, anything can change, and we aren’t completely sure what the future holds. 

Thanks to the GRACE act, we may have a viable solution. This is new information to us, but we think it’s a win-win for the landlord, the tenants, and the taxpayers. If the government just gives out money to everybody, who’s paying for it? It’s going to come back as a boomerang eventually like we’ll see if stimulus money is handed out unscrupulously. 

There needs to be a better solution, but the GRACE act may be the best solution that we have right now. We want to hear your thoughts about this, so please share your ideas with us at Adam@levinecapital.com or Tei@Levinecapital.com