A $34B Rent Debt Crisis Is Looming Over The Multifamily Market

In the absence of any additional economic relief since the CARES Act in the spring, the nation’s renters are getting buried under a mountain of debt.

Rent debt, the accrued balance of unpaid back rent, is a growing crisis among the millions of renters who have lost some or all of their income as a result of the coronavirus pandemic and the economic recession it caused. Its impact on those renters, and the landlords whose rooms they let, goes beyond the potential for evictions.

If a tenant is evicted from an apartment based on unpaid rent, the tenant still owes that money. Outstanding rent debt at a previous residence is virtually disqualifying for a landlord weighing a prospective tenant application, National Housing Law Project Director of Litigation Eric Dunn told Bisnow.

“That’s sort of the way that landlords collect these debts, is they just figure you won’t be able to get housing until you pay, so they’ll wait to get either a check from you or a social services agency that steps in,” Dunn said. “Most debt collectors, if I call them about a payment plan, they’ll do it, but not for landlord-tenant debts. They don’t give people any break, because until you pay, you’re going to be homeless.”

In the first week of October, 31% of respondents to an Apartment List survey said they had not fully paid rent at the start of the month, while 33% of renters reported entering October with outstanding rent debt. A large portion of renters who had been making rent payments to that point reported making financial sacrifices to do so, whether withdrawing money from savings accounts, running up credit card debt or borrowing from family members.

“We’re seeing folks having difficulty making payments, and in a lot of cases, folks are scrambling throughout the month to make sacrifices, but a substantial portion of them still wind up owing their landlord,” Apartment List Housing Economist Chris Salviati said.

Barreling Toward Disaster

Up to 14 million households, containing as many as 34 million people, already owed back rent totaling up to $17B as of Sept. 14, according to a report from the National Council of State Housing Agencies and data firm STOUT. Without any new rental assistance, the report projects that rental debt will reach between $25B and $34B nationally when the Centers for Disease Control and Prevention’s unprecedented eviction moratorium ends on Jan. 1. 

The CDC’s moratorium, announced on Sept. 1 and officially enacted three days later, indicated President Donald Trump’s administration understood the potential ramifications of mass evictions that rent debt could precipitate. The CDC’s clarification on Friday that eviction proceedings could begin ahead of the moratorium’s Jan. 1 expiration seemed to throw out any sort of understanding, including of the very concept of an eviction moratorium.

“The whole thing is very Orwellian,” Dunn said. “The only reason you should be allowed to file a notice of eviction is when a tenant has refused to leave the premises and is there illegally. When [the CDC says] a landlord can’t take any action to remove a qualifying person from the property but then allows them to start eviction proceedings, it’s contradictory.”

The various moratoriums put in place by state and local governments have been more readily exercised by tenants and better understood by landlords and the court system than the CDC’s moratorium, multiple sources told Bisnow.

“I wouldn’t say that [the CDC moratorium] is the main thing affecting what we do with residents,” Mosaic Development Partners co-founder and principal Greg Reaves said. “We’re abiding by what the city is recommending for us, as well as the state.”

At least 64% of renters in Apartment List’s October survey, meant to draw from a representative sample across income levels, has taken at least one extra measure in order to pay rent: taking on credit card debt, borrowing from family or friends, dipping into personal savings accounts, cutting personal spending, selling assets or dipping into retirement savings. All of those measures held steady or increased in terms of the percentage of renters that utilized them from September to October, the only two months Apartment List has asked those questions for.

While surface-level numbers of how many people are making rent payments each month show a slow decline or holding steady, nearly all of the methods renters are using to stay current or make up back rent are short-term in nature. When the savings account dries up or the credit card limit is reached, more renters will miss payments and take on rent debt, Salviati said.

“If folks are taking on additional debt or withdrawing from savings — and 10% are drawing from retirement accounts, which is a serious measure that costs severe early withdrawal fees — it’ll vary by the individual, but these sorts of solutions can only sustain folks for so long,” Salviati said.

The Yoke Of Rent Debt For Tenants

Without billions of dollars in assistance to pay off back rent, millions of households in the U.S., many of them out of work, will be saddled with one of the most damaging forms of debt one can have. If a judge finds a tenant liable for unpaid rent as part of an eviction judgment, interest starts accruing, in some states as much as 12%, Dunn said. For many, that can be the start of an excruciating slide into long-term homelessness.

“Even if the [unpaid rent] is something the tenant disputes or denies owing, they still won’t have a chance [getting accepted to another apartment],” Dunn said. “We’ve been urging state and local governments to enact tenant screening protections to prohibit denying people who have COVID-19-related rent debt on that basis.”

When individuals or households are faced with housing insecurity, public programs from the federal, state and local governments are put in place to prevent homelessness — programs that have been chronically underfunded and stretched too thin to satisfy the need in the marketplace even before the coronavirus hit U.S. shores.

The largest source of rental assistance in the country is the Section 8 voucher program from the U.S. Department of Housing and Urban Development, for which only about a quarter of qualified applicants are approved, NCSHA Executive Director Stockton Williams said. Those who receive vouchers have mostly spent years on a city’s waiting list, after spending years merely to get on that waiting list.

Section 8 vouchers cover the difference between 30% of a renter’s monthly income and the rent of the apartment they lease. For those subsisting on small Social Security payouts, that gap can be relatively huge and impossible to close with other means, Dunn said. If for some reason that monthly income dries up suddenly or is siphoned off by another expense, any rent debt can be the kiss of death for someone’s chance at stable housing — now more so than ever.

“A lot of rental housing is operated by more corporate multifamily management companies with thousands of complexes, and you have even the older, single-family homes and stuff being acquired by private equity firms,” Dunn said. “They don’t want vouchers; they don’t want to deal with the government. So it’s getting harder to find landlords that accept vouchers, and those who do are going to be very selective. They won’t take a chance on someone with rent debt or an eviction history.”

If an agency has reason to believe that someone saddled with rent debt would be able to stay current otherwise, it could step in to pay the balance. If not, the desperate need that Section 8 vouchers fill, combined with the brutal competition to obtain one, means that city housing agencies are likely to revoke a voucher to give it to someone in a better position to find and keep an apartment. 

“If you have a voucher and you lose it, you’re not getting it back,” Dunn said. 

State and local budgets for housing assistance are paltry in comparison to the federally funded Section 8 program, even before considering the deep cuts many of them may endure because of pandemic-driven tax revenue loss.

At least 34 state housing finance agencies have taken extra measures in the past few months to provide rental assistance, Williams said, but most of those measures have been funded by federal dollars from the CARES Act, which is finite (and in some cases has already run out).

“[State housing assistance] is making a difference and doing a lot of good, it’s just not nearly enough to meet the massive need,” Williams said. “There will be a massive increase in demand for affordable housing from those whose hardship has increased, but ... millions of low-income renters were already in incredibly difficult housing conditions before the pandemic, so everything we’re talking about is adding to that.”

All of the above challenges and conditions particularly affect those in historically marginalized communities, such as Black and Latinx renters. A May study by the Urban Institute found that the pandemic was widening pre-existing gaps in housing security across racial lines, and conditions have only worsened since then.

The Impossible Decisions For Landlords

The relationship between landlords and tenants is often characterized as adversarial, but even the most civic-minded and conscientious apartment owners are stuck between a rock and a hard place when their tenants are behind on rent payments. For apartment buildings only drawing a partial share of normal rental income, the same debt obligations still apply unless landlords can reach deals with lenders.

“To the extent that we’re able to satisfy payments, it’s great, but you need to have a lender that’s as sympathetic to your situation as you are to renters,” Reaves said. 

Some multifamily owners confident in their ability to fill apartments once vacated have been eager to evict nonpaying tenants; in the three days between the announcement of the CDC moratorium and its official enactment, a record number of eviction filings were submitted, Dunn said.

Other landlords are more sensitive to the risks of having an empty unit, rather than one filled by a tenant who could ostensibly find a new job and begin to repay their debt. In September, about 75% of Apartment List survey respondents reported either having begun negotiations with their landlord or successfully completed some form of payment plan or forbearance agreement.

“What we ask our residents to do is stay in contact if they’re having problems, and to pay what they can,” Reaves said. “Those who are communicating with us, we’re working with them, and [for] those who aren’t, we do what we can.”

Mosaic has taken such measures as debt forbearance and extending lease terms in exchange for changes in payment structure, Reaves said. One difficulty he mentioned is when local moratoriums are more comprehensive than the CDC’s, because some tenants who had already built up rent debt before the pandemic are now protected in some cases. That can set up an issue of fairness that theoretically could become a legal liability.

“We want to be wary of making better deals with residents that we like,” Reaves said.

The more financial wiggle room an apartment owner has, the easier it is to be amenable to negotiating. But an outsized portion of renters vulnerable to income loss due to the coronavirus live in smaller and cheaper buildings, which are often owned by smaller entities or individuals that rely on rent for their own income. Black and Latinx landlords are disproportionately affected because they are more likely to own such properties than larger buildings in more affluent areas, Dunn and Williams said.

Black and Latinx landlords are more likely to only own one property, more likely to draw less than $75K in rental income and are more likely to have mortgages on their properties than White landlords, according to a September study from the Urban Institute and small landlord services company Avail. More than twice as many Black owners are in forbearance with their lenders than their White counterparts.

Perhaps because they are more likely to live near the buildings they own or know their tenants, Black and Latinx landlords have so far been more likely to negotiate with their tenants on payment, the Urban Institute and Avail study found. As their financial safety nets become exhausted, so might their ability to work with tenants.

If any statistically significant portion of landlords has granted outright rent forgiveness to tenants, none of the Urban Institute, U.S. Census Bureau, NCSHA or NHLP has gathered such data. But Dunn, Williams and Salviati agreed that the voluntary surrender of owed rental income is unlikely to become widespread enough to make an impact on the national rent debt issue.

No matter how landlords would like to behave, a mass eviction event once the CDC moratorium and its state and local counterparts expire seems inevitable, especially in the absence of another economic stimulus package (which is unlikely to be passed until at least after the election). Even renewed supplemental unemployment benefits or another round of economic impact checks would mitigate some of the damage in the absence of direct rental assistance, Williams said.

“I don’t think it’s realistic to expect mass evictions not to happen in the absence of moratoria,” Dunn said. “It would be asking for a miracle, like wishing for the coronavirus to disappear. There’s no reason to think that it would happen.”

If such an eviction wave occurs, the country would be no closer to addressing the billions in debt that will still saddle the nation’s renters. If millions of rental units hit the market without a corresponding increase in potential tenants able to pay for them, the consequences would be clear.

“There would be high vacancy rates, downward pressure on rents, and people who just can’t afford anything,” Dunn said. “It would at the very least create a renter’s market for the people left who can afford housing.”

Low-income individuals and families with rent debt that can’t find another apartment as a result face an “extended period of homelessness,” Dunn said. A larger unhoused population damages a city’s social structure and economy in multiple ways — more burden on shelters, more people on the streets that affect the look and feel of a neighborhood, and fewer consumers for virtually all non-consumable retail products.

“It’s self-evident that [rent debt] will continue to grow during this eviction moratorium while we are still with high unemployment,” Williams said. “We know that most of it is felt by those that are disproportionately represented in the sectors of the economy that have been most heavily affected by the recession. 

“Low-income renters already spend way less on health and food than is recommended by the government, and we expect that problem to get worse,” Williams continued. “People will save less for education, etc. — and that’s just in the best case where they don’t get evicted, where they can at least stay in their home in the dead of winter.”