Why the Eviction Moratorium is a Double-Edged Sword for Multifamily

In September of 2020, the CDC imposed a federal moratorium on residential evictions temporarily nationwide for nonpayment of rent. Due to the pandemic, many were put out of work and the government needed to find a way to keep not only the public but the economy, stable. Now in 2021, the vaccines have been rolled out, and the world looks to be on an uptick back to normalcy; although, the looming uncertainty of the Delta variant, and its spread, is also a part of the equation.

The eviction moratorium was set to expire on July 31st, 2021 and the Supreme Court ruled that the eviction moratorium would come to an end officially in August. While the moratorium has been ended on a federal level, many state and local level eviction bans remain in place. Depending on your location, however, tenants can and are being evicted.

While many landlords and real estate trade groups advocated for the moratorium to end, this could be a double-edged sword for multifamily, as there are also hidden disadvantages to the conclusion of this federal mandate.

The Benefit

The obvious benefit is that landlord is now able to evict nonpaying. Many landlords were unable to evict nonpaying tenants, which led to loss of cashflow for their assets. However, some nonpaying tenants were able to take advantage of the system. For example, we had a property at a very high occupancy rate, yet the tenants were behind on rent. When we threatened to start the eviction process, many tenants went quickly to the leasing office and paid within hours. This shows that there were tenants that had the income available, but were choosing not to pay rent because the moratorium lent a shield.

The Hidden Disadvantages

Now that landlords are able to evict, nonpaying tenants can be forced to leave their residence, leaving vacancies within the asset. For many borrowers, the increase in vacancies could cause an issue with cash flow, and therefore, force them to default on their loan.

Due to COVID-19, lenders were giving a grace period for borrowers to repay their debt due to cashflow being low caused by the eviction moratorium. Now, with the moratorium ending, the grace period could be coming to a close. If, and more likely when, this happens, the lender has a large decision, either foreclose the asset, or keep the asset as is, even though payments are not being paid as they should be.

Another issue could be the sale of an asset. Lower vacancies can hurt landlords looking to sell an asset because buyers will underwrite to the lower occupancy, therefore having an impact on the pricing. At times, a higher occupancy with high bad debt is better than lower occupancy with lower, bad debt. While it varies buyer to buyer, many buyers know how to deal with bad debt, but tend to see occupancy as a submarket issue that is more challenging to resolve.

Summary

Many landlords and asset owners advocated for the eviction moratorium to end after being extended multiple times. While this is largely a positive for owners, the ending could cause some negative impacts as well. Tenants have been able to “work the system” as the moratorium protected them from not paying rent, even if they have the income to pay. The conclusion could also cause low cashflow, leading to borrowers defaulting. Finally, selling assets may become more challenging due to low occupancy, as many buyers regard occupancy as a large factor in underwriting.

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About the Author

Ellie is the founder of Blue Lake Capital, a commercial real estate investment firm specialized in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.

A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.

Ellie is the host of REady2Scale, a podcast that highlights honest, insightful, and thought-provoking discussions on the multiple approaches for successful real estate investing.

She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.

Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.

You can read more about Blue Lake Capital at www.bluelake-capital.com and learn more about Ellie at www.ellieperlman.com.