February 2, 2021
Robert S. Smith
Heretofore, the apartment business has weathered the pandemic and attendant economic lockdown better than many other commercial real estate sectors. However, this is beginning to change.
Many mom and pop landlords continue to struggle through the current eviction freeze. The longer this lasts, the greater the risk of them losing their properties to foreclosure.
Retail owners of multifamily buildings are now falling behind on loan payments. As such, banks view a greater number of rental loans as high risk. Therefore, fewer lenders will likely be available in the future to help mom and pop landlords.
In their totality, eviction protections, lower rent collections and unprecedented declines in asking rents in some urban markets are taking their toll on apartment owners. Simply put, eviction moratoriums and tenants not paying rent are making it difficult for landlords to cover loan payments in some markets.
This stress is exacerbated by blue state progressive governments and their on-going war on landlord rights. In cities up and down the west coast, tenants are now in a position to wreak havoc on landlords.
Enjoying protection from eviction, an increase in “ghosting” is now occurring in the multifamily sector. This is where residents of rental properties don’t feel like they have to talk to the landlord or anyone else to work something out.
As such, a single, recalcitrant tenant can effectively take over a property at the expense of other renters and the landlord. It’s bad enough that with myriad legal protections in place landlords can’t evict these people but increasingly they now intimidate and harass others. As such they bring an undesirable element to the property which in turn may negatively impact values.
Everything you look at and read these days is all about tenant rights. However, there are precious few landlord rights remaining to counterbalance this.
This is in no small part due to the false notion that rental margins are fat and landlords’ cash rich. However, the reality is landlords earn roughly nine cents on every dollar in rental income collected (Washington Examiner 1/5/2021, Jay Heflin). The balance goes to mortgage and maintenance payments, insurance, taxes, etc. Therefore, landlord’s ability to keep their apartment properties afloat in the face of continuing rent delinquencies is limited.
Into this breach rushes the Biden Administration. As part of his first wave of executive orders, President Joe Biden has extended the federal eviction moratorium until the end of March. However, the Biden Administration’s proposed $1.9+ billion stimulus package contains an additional 6 month eviction moratorium extension to September 30, 2021. They attempt to offset this with a landlord rental assistance program. The likelihood of this closing the gap between rents owed and rents collected is slim though. Some help. Without doubt, this may simply increase the stress and pain already being experienced by mom and pop or smaller landlords.
Fortunately, larger, better capitalized apartment companies may be better positioned to endure this, hence the DST option. Transitioning to remote ownership via DSTs could potentially not only mitigate much of the stress income property owners are currently experiencing from government’s war on landlord rights and abusive tenants but also better position you to maintain the integrity of invested equity and access whatever stimulus funds the government sees fit to send your way in the future.
With smaller rental property owners definitely feeling the squeeze, the traditional rental-apartment business model is beginning to show cracks. This is the strongest possible argument to consider transitioning to the DST ownership platform.
With many renters now leaving large cities to buy homes in the suburbs or find cheaper apartments, timing couldn’t be better to review your options. Large DST property providers are better positioned to capitalize on this trend and skew their offerings accordingly.
Finally, DSTs aren’t forever. Since inception over 20 years ago, the average holding period for a DST property has been a little over 6 years. Therefore, if the legendary Sam Zell is right and renters as social animals do decide to return to the city once this plague abates, you can go with them.
Multi-family was a sound business before the pandemic and attendant rental moratoriums. Therefore, it could very well be sound again in the future. However, in the interim, large owner-operators are much better positioned to ride it out than smaller landlords. This by itself is reason enough to give serious consideration to the DST ownership format.