By Anthony Cammarata Jr. and Nicholas P. Flint
This article was published in the Cherokee Tribune & Ledger News on January 2, 2021: https://www.tribuneledgernews.com/opinion/from-the-bench-bar-landlords-should-prepare-for-a-potential-bubble-burst/article_b852b9ba-4ac6-11eb-a230-af7b871e15e7.html
While many of us may be happily leaving 2020 behind, the economic fallout of the COVID-19 pandemic unfortunately may follow us. In particular, the ramifications from missed or otherwise deferred rent payments are threatening a significant portion of the U.S. renting population, and the eviction bans previously put in place by questionable government "orders" that have protected tenants will soon expire. A bubble may be forming in the U.S. real estate market, and it is imperative that residential and commercial landlords plan now for a potential burst of that bubble in the new year.
Since March of 2020, when the pandemic and ensuing knee-jerk governmental orders resulted in temporary shutdowns of most businesses, an increasing number of Americans have found it difficult, if not impossible, to stay current on rent payments. To make matters worse, many businesses still remain closed, possibly permanently, across the country, forcing business owners and residential tenants to seek unemployment benefits and drain their savings to make ends meet.
To date, federal and state eviction moratoriums have protected those individuals and businesses from being forced out of their commercial properties and homes. But the national eviction ban, and even some state and local protections, are set to expire as early as January 1, 2021 unless they are extended. Renters who cannot afford to catch up on the months of missed payments will then face the likelihood of eviction. To make matters worse for those tenants, the expiration of eviction moratoriums could coincide with the expiration of the COVID-19 relief programs passed by Congress this year to expand and enhance unemployment insurance benefits, creating a perfect storm that could have wide-reaching effects on the broader economy.
Moody's Analytics estimates that over 12 million Americans would owe an average of $5,400 from missed rent payments accrued during the pandemic. According to the investment bank and financial-advisory firm Stout Risius Ross, between 2.4 million and 5 million American households are at risk of eviction in January alone. Following a survey conducted by the Federal Reserve Bank of Philadelphia, the research institution warned that evictions could increase as much as 50% next year.
The landlords to which this rising amount of unpaid rent is owed have mortgages of their own to pay, as well HOA assessments, taxes, insurance, maintenance, property management, and other costs. If unpaid rent leads to missed mortgage payments by landlords, a chain reaction of defaults could result, which would certainly have a substantial impact on the U.S. economy. Further government-mandated lockdowns would undoubtedly exacerbate this problem.
Some states are opting to extend the eviction bans. Nevada, for example, recently set a new eviction moratorium that will end on March 31, 2021, and housing-industry executives are expecting the federal eviction bans will likewise be extended before the end of the year. While these extensions may have tenants facing eviction breathing a collective sigh of relief, rental property owners are the ones forced to shoulder the burden of further extensions. Little to nothing is being done to protect these property owners. How much longer can we expect them to withstand the pressure, especially when they too are facing the other economic effects of the pandemic and consequent business shutdowns?
Residential and commercial landlords would be well advised to seek proper legal and financial guidance, and to put appropriate contingency plans in place in anticipation of the potential bursting real estate bubble. This planning should not only consist of preparation for a spike in tenant defaults and foreclosures, but also the establishment of effective asset protection strategies. From additional rent deferral arrangements for existing tenants, to aggressive marketing for prospective new tenants, to the initiation of eviction proceedings, landlords should be ready in 2021 for the potential fallout in the real estate industry from COVID-19.
Nick and Anthony are attorneys with Flint, Connolly & Walker, LLP who represent clients on a variety of corporate and real estate matters. Nick and Anthony also routinely serve as a general business and legal advisors to their clients, counseling on matters such as corporate governance, executive compensation, regulatory compliance, and commercial contracts.