As we anticipated, the economic crisis caused by the COVID-19 pandemic has reached a breaking point for both tenants and landlords. If handled incorrectly, the plight of tenants (and somewhat later) landlords can threaten the entire real estate market and metastasize into a long-term cancer for the entire economy.
The situation is bad…
Households: the lack of income means that many are struggling to make ends meet and fulfill their financial obligations, of which rent is the biggest at an average of 30% of monthly net income. The Aspen Institute estimates that almost 40 million Americans will face evictions in the coming months across the United States[i].
Businesses: they too, particularly small businesses, struggle to make payments for commercial rents. Many have tried to hold on for months, cutting down expenses and letting go of employees (contributing to the plight of households). Yet, unable to make rent payments and spiraling deeper and deeper into debt, many businesses are in danger of bankruptcy or closure while some have already permanently closed.
This wave of closures and bankruptcies will permanently leave their employees and owners without income streams. Worse, this large shock to the economy will significantly depress economic activity and very much slow down the recovery nation-wide. It’s important to remember that small businesses represent almost 50% of the annual GDP of the United States, and employ nearly half of the workforce.
Landlords and financial stakeholders are the next shoe to drop
Though they won’t receive the income generated through rent, landlords will still bear the burden of mortgage and loan repayments to financial intermediaries. Absent the funds to meet these financial obligations, landlords may be faced with foreclosures on their properties, losing their income streams permanently.
Further, when all these evictions or loss of tenants occur in a short time frame, the impact on the real estate market will be large. With a lot of supply and depressed demand, it may be a year or more before new tenants can be found to move in and start paying rent. Even so, significant price reductions are all but assured and may last for several years.
In the best case, some landlords may cope despite having suffered many months of empty real estate assets and accepting lower rents in the future. In the worst cases, the landlords themselves are unable to meet their own financial obligations and suffer bankruptcy or a permanent capital loss.
This inability to pay financial obligations and consequent capital losses or bankruptcies will ricochet up the financial chain, drawing more and more people and businesses into the crisis. If we can avoid all of this, the crisis will be much shorter and the recovery much faster.
The wrong kind of government intervention
With millions on the verge of losing their homes and businesses, the government stepped in with a $2.2 trillion stimulus package under the Coronavirus Aid, Relief, and Economic Security Act (CARES ACT) that included a $1,200 stimulus check for every eligible American and a $10,000 forgivable loan (EIDL) to small businesses needing to stay afloat (though demand far outstripped supply with the EIDL program and many businesses received only a small pro-ration) .
While this intervention was massive in terms of cost to the budget, it failed to properly address the concerns of the crisis. Leaving aside bureaucratic inefficiencies (that are predictably inherent to this kind of intervention) the simple fact is that the amounts are insufficient to have any meaningful impact. For example, the median household rent in the United States is $1,400, meaning that the $1,200 check would not even cover rent for a month, forget the seven months that the crisis has claimed to date.
Similarly, the loans or grants to the businesses are too small to allow them to retain and pay their employees and stay in business in the face of collapsed revenues while still facing huge rental and financial obligations. In fact, these loans or grants only provided enough funds for businesses to meet overhead expenses such as rent, loan repayments, and engine and crew expenses for approximately two weeks, meaning that the loans are grossly insufficient to maintain employment — let alone stimulate anything.
In short, massive ‘relief’ or ‘stimulus’ packages are not a working solution as the money that can be provided is only a temporary band-aid. Indeed, the amounts that would be required in this form to make everybody “whole” over many months would be truly cost-prohibitive.
Rent Relief — a one-legged solution
A proposition that has gained far more traction is rent relief programs. A rent relief program would be legislation that allows businesses and individuals to continue inhabiting properties without having to pay rent for a certain amount of time for the duration of the national health emergency. It is important to note that this is different from the moratorium on evictions that certain states like California have implemented. The eviction moratorium only prevents landlords from evicting tenants for not paying rents and further requires the tenants to repay any missed rent payments within 12 months of their initial due date. In contrast, rent relief programs would cancel the accrual of rents during the crisis entirely.
While this proposition is tempting, it does not, by itself, solve the crisis — but instead only shifts the burden of these payments further along the financial chain. The missed rent payments would push the financial burden onto landlords, who still must repay financial intermediaries for their mortgages while facing no or much reduced rental revenues.
“Time Suspended” — a comprehensive solution
Instead of attempting to relieve only the first level of the financial chain and therefore shifting burdens down to other parties, a comprehensive relief mandate such as “Time Suspended” would be far more efficient.
Time Suspended incorporates rent relief as a part of a universal mandate setting ALL interest rates on ALL financial assets, ALL unproductive business real assets, and ALL personal mortgages to 0% on all preexisting contracts while the crisis lasts; and concomitantly sets a grace period for any installment, and extends all contracts by the same amount of time, as appropriate. The deferments and suspensions are modulated over time in proportion to business or household income contraction.
NOTE THAT THE GOVERNMENT IS ALREADY DOING EXACTLY THAT WITH STUDENT LOANS: 0% + DEFERMENT.
By making the solution ‘universal’, all economic agents down the chain that see a reduction in their income or revenues reduced, would benefit by a corresponding proportional reduction in their own financial obligations.
As a result, the burden of lost revenue is distributed across all agents in the economy rather than completely obliterating one level (businesses and households, or landlords, or financial intermediaries, or bondholders).
The sharing of the burden would give businesses the resilience they need during an unprecedented economic standstill, without simply shifting it onto landlords and financial intermediaries.
If the Time Suspended framework can be implemented, all sectors would share a piece of the burden but the cascade of bankruptcies and loss of capital assets would be averted — leading to a much faster recovery.
Luca Donà, Joanne Rachel Lobo
[i]https://www.aspeninstitute.org/blog-posts/the-covid-19-eviction-crisis-an-estimated-30-40-million-people-in-america-are-at-risk/
Thanks to Jeremy Dilbeck for his suggestions and edits.
