Will U.S. Stimulus be Enough to Save the Upcoming Rent Shortfall?

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There are two ways to fall off a bike. One way to do it happens suddenly. You are riding along and the next thing you know you are on the ground, left to examine your wounds and wonder what you did wrong. The other way happens seemingly in slow motion. You feel yourself getting off-balance but are powerless to stop your gradual, agonizing descent onto the pavement.

Right now it feels like the economy is doing the latter. The virus came on suddenly but the economic effects are tipping off balance, pushing us slowly off our bike seats. As many people are unable to work, or are out of work entirely, they are wondering the same question: “How do I pay rent?” Even in good times, there were shocking reports that showed that almost three-quarters of American’s are living off of their paychecks, with little or no savings cushion. Many of the hardest-hit industries, like hospitality and food service, are some of the most vulnerable financially. The rise of gig work and the era of the sharing economy have left millions more with no income and with worker protections or affordable health care options. It seems that technology has found a way for us to share almost everything, except our safety nets.

As of this morning, the unemployment numbers will be in and we will start to be able to understand the extent of the damage. U.S. lawmakers are on the verge of passing a stimulus package that would include one-time cash payments, a temporary moratorium on evictions and mortgage forbearance options. This will go a long way towards alleviating the enormous income gap created by jobsite closures and stay-at-home orders. The individual stimulus payout is estimated to be around $1,000 per person. That’s less than the median national rental price for a one-bedroom which was estimated to be $1,078 at the end of last year.

Landlords around the country are getting calls from tenants asking for leniency. This puts owners and managers in a tough spot both economically and morally. What is their responsibility to tenants? How do they determine who gets help and who doesn’t? What kind of assistance can they afford without risking losing their property or their business? I wanted to understand how some of the most innovative property industry professionals were thinking about the upcoming, unprecedented mass rental negotiations so I sent emails to dozens of the industry leaders that I have been lucky enough to meet in my time writing about real estate. What I found was that everyone in the industry is in disaster relief mode right now. They already have so much risk on their plate that sticking their neck out with an opinion on this potentially litigious situation is the last thing they wanted to do.

I did find one well known landlord that was willing to talk to me. Well, at least well-known online alter ego. He (or she, but I will call him “he” because statistically there is a high probability that it is a white guy) tweets under the humble handle of The Real Estate God and has gained a devoted following for his hot takes on the commercial property industry. He agreed to talk to me about how he was dealing with this upcoming rent crisis as long as he could remain under his digital avatar.

I asked him what he thought about landlords’ responsibility to help tenants in these uncertain times. “Obviously, you buy real estate to make a profit. But landlords have a moral and ethical responsibility to help their tenants out as much as possible. If you have to sacrifice a few months of profit in the short term in order to do the right thing, it’s an easy decision,” he told me. He even saw an upside to the profit loss, “Your tenants will thank you for it and will be more loyal going forward, which might actually increase your profit in the long term by decreasing vacancy. Although this isn’t why you should help your tenants out—you should help them because it’s the right thing to do.”

Even if landlords want to help tenants, they have their own financial obligations to worry about. The stimulus includes language about mortgage forbearance from institutional lenders like Fannie and Freddie but many commercial buildings have debt private lenders. “While the communication coming from the government here has been a little unclear regarding whether mortgage payments will be legally suspended or not, the general consensus is that most lenders have been willing to work with sponsors,” said The Real Estate God. “Based on feedback we’ve received from lenders, around 90 days of suspended payments is what they’re currently willing to offer.” He went on to get the caveat that this was obviously deal dependent. He said that he has also seen lenders offer to suspend capital expenditure reserve payments and extend interest-only periods.

Calling something deal dependent is a nice way of saying that it depends on the negotiation—and the negotiators. “Lenders that are typically most willing to work with you are balance sheet lenders at local banks,” The Real Estate God advised. “Aside from typically having more lenient debt covenants and a less sharky lending strategy, a lot of times your loans represent a significant amount of money for them, which gives you more leverage.” He explained that debt funds are generally way more “sharky” and sometimes incorporate foreclosures as a business strategy, so they are often less willing to negotiate.

“The biggest item here is property taxes, which state and city governments have foolishly decided not to postpone. With that heavy of an expense load and no revenue coming in, landlords will go under—doesn’t even matter if their mortgage is deferred for three months.”

The Real Estate God

He also said that one of the biggest issues not being talked about are tax liabilities. “The biggest item here is property taxes, which state and city governments have foolishly decided not to postpone,” he said. “With that heavy of an expense load and no revenue coming in, landlords will go under—doesn’t even matter if their mortgage is deferred for three months.” Many multifamily buildings operate on a thin margin already and are now going to have more wear and tear with people sheltering in place.

But these are complicated things to communicate to a renter. While many landlords and renters will come to agreeable terms, many will not. There are plenty of buildings that have contentious relationships between occupants and ownership, especially within workforce housing properties, whose renters are disproportionately hard hit. There have even been organized calls for rent strikes, hanging white sheets in buildings to communicate solidarity in some cities. A ban on evictions could incentivize bad actors. Rent strikes are a very real possibility that the industry should acknowledge as the impact could spiral past the unfortunate few properties that have to deal with them and create a trend of insolvency that could devalue the entire asset class.

So how should landlords act in this uncertain time? How can they do what is right for society while rightfully protecting their assets and livelihoods? I was able to get a hold of Dana Brody to talk about this. She is director of the National Multi-Housing Group for Marcus & Millichap in Los Angeles and always provides a unique perspective on industry events. She fell into the brokerage world. She started off thinking it was just a temporary and now has become one of the most well regarded brokers in the second biggest city in the county. She has a level of warmth and empathy that is rare in a high-commission position like commercial property sales. “If renters do not feel heard and instead feel marginalized or ignored, they may go the way of a rent strike to make themselves heard,” she said. “I believe that can be avoided through empathetic, communicative management that gets ahead of the problem and works with the tenants to come up with proactive solutions.”

The first step is to be as helpful as possible during these hard times, “Check in on your residents more, this is a time to build a stronger connection with them,” Dana said in her usually smiling tone. “See if they need help, especially the elderly or immunocompromised. Working to build a stronger sense of community within the building, even if it’s at a social distance for now. Set up meal trains for families or offer to do grocery shopping for those who need it.”

Ultimately this will lead to a stronger bond that will help avoid standoffs and lawsuits, situations that usually leave both parties are usually worse off in the end. “By working with the tenants and creating a sense of community tenants will want to be a good community member and find ways to be fair,” Dana said.

We are in uncertain economic times. That fact can not be understated. But, we are also at a bit of a crossroads when it comes to class relations. The last economic recovery already created a chasm between the blue and the white collars. Populist politicians and protectionist policies are a symptom of the dissonance politically and economically in almost every country. This upcoming rent period might be the event that ignites a battle between property owners and renters and creates a chain of defaults that could take the delicate U.S. economy with it. Or, it could be a way for the property industry to demonstrate it’s benevolent potential to society. We have an opportunity to shelter people, both physically and financially, from all the elements the world can throw at them and help build resilience into our financial institutions. The decision is ours, all of ours, as renters, landlords, citizens and humans. The decision will be needed by the end of the month.

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