Posted on June 21, 2021
The Federal Eviction Moratorium Ends July 31, 2021. What Does That Mean For Multifamily?
Update, June 28, 2021: On Thursday, June 24, 2021, CDC Director Dr. Rochelle Walensky signed a one-month extension to the agency’s eviction moratorium. According to the CDC, this is “intended to be the final extension of the moratorium.”
Meanwhile, both the U.S. Department of the Treasury and the Department of Justice are working closely with local authorities to prevent a spike in evictions beginning August 1. At least six lawsuits challenging the CDC’s order are still making their way through the courts, and more than $47 billion in emergency assistance remains to be distributed to renters.
For more information on these latest developments, visit the AP News website.
The pandemic delivered a sucker punch to the economy in 2020. The commercial real estate industry didn’t take the brunt of the blow, but it has definitely felt COVID-19’s impact, one that will likely ripple through markets for years to come.
We’re seeing that now in the multifamily sector. Although this property type has shown admirable resilience, particularly across the Sunbelt, it may soon face new, potentially more formidable, tests. Specifically:
- A torrid residential real estate market that shows no signs of cooling off.
- Widespread construction material shortages.
- The end of pandemic relief programs — the Centers for Disease Control and Prevention’s (CDC’s) eviction moratorium chief among them — that have kept occupancy rates from dipping to dangerous levels.
The Current State Of Multifamily
Before we look to the horizon, it helps to look back down the path the multifamily market has traveled in the past year-plus. It opened strong in January 2020 but took a second-quarter plunge as shutdown orders rolled out. The unemployment rate, which had been near an all-time high at the start of the year, shot up to 14.7 percent in April 2020, throwing many residential tenants into financial straits and threatening rental incomes. Cautious investors took a wait-and-see approach. An August rebound brought multifamily transactions back to near pre-pandemic levels, but occupancy rates remain uneven across the country.
The latest Census data shows that the nation’s population is moving away from densely populated megalopolises (New York, Chicago, Los Angeles, San Francisco, etc.) and relocating to suburbs and smaller communities. The pandemic has only accelerated this trend. But the pressure relocating tenants placed on landlords in 2020 also translated into suddenly more affordable Class A and Class B units. Consequently, the big cities appear to be making a comeback in 2021.
Senior CRE Economist Thomas LaSalvia of Moody’s Analytics believes “…that the combination of returnees and first-time movers, now attracted by lower rents, will be enough to stabilize the apartment sector in key urban centers.” The experience of Texas cities such as Dallas, Fort Worth, and Austin that are home to sprawling, suburb-like metro areas validates this prediction.
A surging economy only brightens the forecast for multifamily. Vaccination rates are rising. Jobless claims continue to trend downward. Wages are up, although many are watching the recent CPI spikes with some anxiety. National average effective rents are only projected to increase by 2.1 percent by the end of 2021. (Compare this figure to the 3 percent drop they endured in 2020.) The Fed will probably suppress interest rates through 2022.
Still, one big unknown in the multifamily sector looms. How will the expiration of the federal moratorium on evictions, in effect since March 2020, impact operating income and property values going forward?
While the current CDC moratorium is set to expire at the end of June 2021, some states and cities have extended similar local orders through the summer. Meanwhile, legal challenges to these measures mount with court decisions coming down on both sides of the issue.
Timeline: Eviction Moratoriums And Government Relief Efforts
Will the end of the eviction moratorium spark a housing crisis? This uncertainty casts a shadow on an otherwise rosy multifamily outlook. How did we get here?
March 2020: As COVID-19 spread across the nation, President Trump declared a national state of emergency. Schools and non-essential businesses shut down. Congress quickly passed the CARES Act, which President Trump signed into law on March 27, 2020. Key provisions of this $2.2 trillion emergency relief package included a 120-day moratorium on residential eviction filings on federal-related properties. This included properties with federally backed mortgage loans and rural housing and Violence Against Women Act voucher program properties.
The CARES Act also expanded unemployment benefits and made $290 billion in direct stimulus payments, which shored up tenants’ ability to pay rent.
July 2020: The CARES Act eviction moratorium expired July 24, 2020. However, tenants could not be forcibly removed from their homes before August 23, 2020.
September 2020: The CDC, out of concern that homelessness would fuel virus transmission, ordered a temporary halt to residential evictions. This order expanded on the CARES Act to include any property rented as a residence, not just federal-related properties. The CDC’s original order was set to expire in December 2020.
The CDC moratorium does not bar landlords from filing eviction notices on tenants for breaches of contract other than non-payment, and it does not relieve a tenant’s obligation to pay back rent. Tenants seeking relief under the moratorium must prove need. Unlike the CARES Act provisions, the CDC order includes penalties for landlords that violate the order and penalty of perjury for tenants who falsely declare eligibility.
December 2020: A second pandemic relief bill sent out another round of stimulus checks to Americans, extended the enhanced unemployment benefits, and provided $25 billion in rental assistance.
February 2021: In Terkel v. CDC, an Eastern District of Texas federal judge ruled the CDC moratorium unconstitutional. The Department of Justice (DOJ) immediately filed an appeal.
March 2021: President Biden signed a third stimulus bill, the American Rescue Plan, into law. It included $21.55 billion for emergency rental assistance, $5 billion in emergency housing vouchers, direct payments to most taxpayers of $1,400, and an extension of expanded unemployment benefits through Labor Day.
May 2021: A federal judge in the U.S. District Court for the District of Columbia ruled the CDC did not have the authority to impose a nationwide moratorium on evictions. The DOJ again filed an appeal. Meanwhile, government agencies began rushing to distribute American Rescue Plan funds to needy tenants to avoid evictions.
June 2021: Housing advocates increasingly call for further extension of the CDC eviction moratorium. The Biden Administration appears unlikely to grant any such extension.
The Multifamily Market: A Post-Pandemic Outlook
Experts differ on the severity of any coming eviction crisis. Some even believe there is no crisis at all. Unfortunately, the most recent data presents its own contradictions.
In March 2021, the National Multifamily Housing Council released a report indicating that the percentage of residential tenants who have made full or partial rent payments had returned to near pre-pandemic levels. But in May, the National Equity Atlas warned that nearly 6 million Americans are still behind on their rent. The average owed? $3,400, for a nationwide debt total of $20 billion.
Clearly, landlords who are counting on tenants to pay back rent to cover their own expenses may run into trouble. Yet an overall decrease in consumer debt and boost in savings rates indicate that tenants are in a better position to pay. For struggling landlords ready to sell, the market is strong, and now may be the time to put properties on the market.
Perhaps of greater concern is the extent to which demand is outpacing supply. Many Sunbelt cities are currently experiencing chronic housing shortages. According to the Texas Real Estate Center at Texas A&M University, “Texas’ months of inventory(MOI) [is] down to 1.3 months. A total MOI around six months is considered a balanced housing market.”
Affordable housing is in even shorter supply. The Center also reports that MOI “for homes priced less than $300,000 slipped below 0.8 months” in April 2021. As a result, more would-be buyers are becoming renters. The multifamily market could overheat much as residential real estate has in Q1 and Q2 of 2021.
In fact, the scarcity of affordable housing may be the biggest issue facing the U.S. housing market over the next two to three years — especially if President Biden is unable to enact his $2.25 trillion infrastructure plan and its proposed $213 billion allocation for affordable housing programs and initiatives.
Meanwhile, new building has fallen behind schedule. The inflated costs of building materials, supply chain issues, and labor shortages have created delays in new construction projects all throughout the pandemic. However, the news on that front isn;t all bad. A recent survey conducted by the U.S. Chamber of Commerce reveals that contractors are confident these issues will level out later this year.
Overall, multifamily investors should brace themselves for a rental rebound marked by significant geographical variation. Sunbelt cities with lower housing costs compared to their coastal counterparts can expect units to refill quickly as the nation pulls out of the pandemic. While major metropolitan areas are reopening and infill projects in urban centers are on the rebound, population shifts to suburbs, exurbs, and mid-size cities are expected to gain steam. Stakeholders would be wise to follow the advice shared by LPA President Mark Lowery last year: focus on the local and view trends from multiple points of view.