Lisa Pelloni and her husband are apartment owners in the suburbs of Charleston, S.C. Their property investments spread across several bedroom communities around the Charleston tourist hub, and their renters are largely the people who clean hotel rooms, wash dishes and serve drinks to the 7.3 million visitors who come to Charleston each year.
Those properties were supposed to support the Pellonis in retirement, and the business they built was supposed to be their children’s inheritance. Then COVID-19 hit, and the flow of tourists was strangled. Hotel occupancy dropped 30 percent in Charleston this summer, and the city estimates it lost $1 billion in revenue.
The jobless rate, which spiked in the state and across the country at the beginning of COVID-19, has come down. Still, the damage done to people like the Pellonis, whose tenants work in hospitality, has lingered. Rents remain unpaid, but their own mortgage and property tax bills keep coming. “We have mortgaged our home to purchase these properties,” Lisa Pelloni says. “If something doesn’t give fast, we are faced with the crisis of us losing the property. We run the risk of not having that future for our family that we worked hard for.”
Nationally, the entire rental market is starting to see the consequences of what has long been predicted as a looming eviction crisis. The potential impact on renters who have lost their jobs due to COVID-19 is clear. Many of them will likely land on the streets when a federal eviction moratorium lapses at year’s end. But a second crisis is waiting in the wings. An army of small landlords like the Pellonis rely on those rent checks to pay the mortgages and taxes on their properties. The second crisis could shock the real estate market and the budgets of counties, cities and school districts in ways reminiscent of the 2008 housing crisis.
South Carolina is at the leading edge of the pending crisis. According to the Eviction Lab at Princeton University, the state has the highest eviction rate in the country. South Carolina issued an eviction moratorium this spring, following the lead of states across the country, and that freeze bought renters time to allow the economy to restart and for paychecks to return. It was needed. The National Low Income Housing Coalition began recording the number of families under risk of eviction since the pandemic hit in March. In August, the agency released its report. More than 200,000 households in South Carolina were at risk of being evicted. Job losses have been the primary pressure placing families under the threat of eviction. The state moratorium was lifted in May, and two counties in South Carolina recorded 2,000 evictions during the summer.
The federal Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was a $2.2 trillion stimulus plan passed and signed by President Trump in March. Almost one-quarter of the stimulus was dispersed in direct payments to citizens, including financial assistance to those who had lost their job or were furloughed during the early stages of the pandemic. But those funds have expired. By September, an estimated 200,000 renters had failed to make payments, according to the National MultiFamily Housing Coalition.
When COVID-19 surged again in the summer, the federal government offered renters even more time. The Centers for Disease Control and Prevention (CDC) put in a federal moratorium on evictions until Dec. 31. The idea was to avoid hastening the spread of the virus, as might happen if homeless people were forced into shelters or into doubling up with family and friends. But that didn’t give struggling tenants the money to pay their rents, so it didn’t offer much help to people like the Pellonis. And when the CDC moratorium ends, a tidal wave of evictions could follow. For states and localities this scenario could spell a disaster beyond public health and housing. A new wave of evictions would strain homeless services, and could help spread COVID-19, but local and state leaders also fear the potential fiscal fallout. The rents collected by property owners turn into tax dollars that pay for schools and public services.
“The underlying issue is these are stopgap measures, rental arrears are continuing to accrue,” says Charles McNally of NYU’s Furman Center, a real estate think tank. “If there is not robust federal rental assistance there are going to be a lot of evictions and foreclosures because landlords are going to fall behind on mortgages and property tax payments.”
Moody’s estimates that more than $500 billion in tax revenues could fall through if evictions sweep the country. States would not feel a deep impact, as property taxes account for only a small percentage of the revenues they collect. But counties, cities and school systems, for which taxing land and homes accounts for a huge chunk of revenue, would be devastated by a wave of foreclosures. Losing this money could require slashing not only school budgets but local services at a time when demands have increased due to the pandemic. In recent months, COVID-19 hung over budget negotiations in Philadelphia. In June, the city froze a planned increase in police spending, and announced plans to lay off 450 city workers because of budget concerns.
A federal rent bailout could solve the problem, but it would be very expensive. To help families who lost their jobs during COVID-19, the federal government would have to lay out at least $14 billion per month, according to a study by the Urban Institute. The federal government hasn’t signaled that a large-scale real estate bailout is coming. Meanwhile states, counties and cities don’t have the money to fund their own bailouts of the rental market. And that is placing pressure on them to restart their economies even when the safety of that is debatable.
“By hanging cities and states out to dry,” McNally says, “you are putting pressure on cities and states to reopen in a way that is not ideal for public health.”
When the CDC eviction moratorium is lifted on Jan. 1, the world is bound to look different. There may be a new administration poised to take over in Washington, D.C. The spread of COVID-19 may have slowed. But few in the property business have confidence that the months of back rents can be paid come Jan. 1. “The moratorium expires and the rent is due,” says Greg Brown, senior vice president with the National Apartment Association. “What’s the chance that someone is going to write a check for past due rent? How likely are they going to be able to write that check and catch up?”
Evictions have grabbed the attention of lawmakers. Cities have dedicated millions of dollars to evening the playing field in the courts where evictions are meted out. Thanks to city-funded programs, tenants facing evictions in Philadelphia, New York and Washington, D.C., are more likely to walk into court with an attorney than they were three years ago. Having an attorney reduces the chance a tenant will be evicted by half, according to the National Center for State Courts.
Staving off evictions can save cities from being crushed under an onslaught of new homeless families, but it doesn’t solve the dilemma facing landlords. Rents are dropping in what were some of the most expensive markets, according to an analysis by the real estate website Apartment List. Since the spring, rental asking prices are down more than 17 percent in San Francisco and more than 10 percent in New York. Forty-one cities across the country have experienced rental price drops since the virus began to spread. Property owners, especially small operators like the Pellonis, are reaching into their reserves to pay their mortgages. That won’t last much longer. Eventually, they and other small operators will probably have to cut their losses and sell.
“A lot of these property owners could default on their own mortgages and could be forced to sell off to institutional investors,” says Corianne Scally, research associate with the Urban Institute.
The CARES Act included mortgage relief, but only for federally backed FHA mortgages. Rental properties rarely fall under this category. And while the CDC order froze evictions, it offered no assistance that property owners could have used to pay mortgages. “We haven’t seen anything from the administration on helping out rental property owners,” Brown says, “and it doesn’t appear that Congress can get together around this issue.”
During the Great Recession, institutional investors scooped up distressed single-family homes and converted them to rental properties. This time, a heavy burden may fall on multi-family units owned by small mom-and-pop property companies, many of them owned by black and Latinx landlords, who on average earn less money than their white counterparts, own fewer units, and are more likely to offer renters more lenient terms for repaying back rent. Those minority landlords are also more likely to have mortgage payments to make on their investments and to be behind on those payments.
In South Carolina, Lisa Pelloni’s phone has been ringing steadily. On the other end of those calls are large real estate companies. In addition to the properties they own, the Pellonis manage additional units for other small landlords who own a handful of apartments each. The pitch from the large investors is quick and to the point. “‘When you hear about properties in your portfolio that are in distress, give us a call so we can make an offer,’” Pelloni hears them saying. “They are waiting in the wings.”
For landlords whose reserves are running thin, the offers get more appealing by the day. And if those properties are flipped, if institutional investors take possession of the buildings, many of them will likely be turned into luxury dwellings. COVID-19 has brought the rental market to its knees, and institutional investors may change the mix of apartments in Charleston and cities across the country. Pelloni thinks the move could displace the low-wage workers who are the backbone of the local economy.
“Affordable housing in Charleston is in huge demand,” she says. “I honestly don’t know where all these people would live if these apartments are sold.” And she would no longer have the nest egg that she had counted on.