Managing Tenant Delinquency During Economic Uncertainty

In early 2020, COVID-19 suddenly and significantly impacted billions of people across the globe. In response to the pandemic and with an eye toward health and safety, entire countries went into lock-down. As economies began to re-open, social distancing and capacity restrictions largely remained in place, limiting the profitability of businesses in industries such as food service, retail, entertainment, and travel. Coupled with more conservative consumer spending, these shifts led to massive layoffs, furloughs, and pay cuts. With millions of people facing declining income or unemployment, a rent crisis began to emerge, resulting in tenant delinquency at a scale that has not been seen to date. 

Who is feeling the rent crisis? 

According to the Aspen Institute, “As federal, state, and local protections and resources expire and in the absence of robust and swift intervention, an estimated 30-40 million people in American could be at risk of eviction in the next several months.” Compare this number to the 3.7 million evictions that were filed annually, pre-pandemic. Consider, too, that typically eviction judgments involve less than $600 in rental debt, which is about one months’ rent. As unemployed renters deplete their savings, particularly in large cities where the cost of living is much higher, we will see an even greater increase in tenant delinquency as we approach the end of the year. 

The issues arising out of the rent crisis are putting a strain on two key groups of people: the tenants and the property managers. When COVID-19 hit, almost 21 million households (or about 48% of all renter households) were already rental cost-burdened, which means allocating over 30% of their income toward rent. Additionally, one in four renters spent over 70% of their income on rent. These numbers indicate that a large number of renters were already facing housing instability. With the pandemic’s added pressure, the National Council of State Housing Agencies predicts a $34 billion deficit in rent paid by January 1, 2020. 

At the same time, without predictable rental income and a backlog of missed payments, many property managers have exhausted their reserves and are struggling to cover their own financial commitments. These obligations include property taxes, mortgages, insurance, utility bills, property improvements, maintenance and repair costs, and additional disinfecting costs. Zillow estimates that a rental unit’s average profit margin has already dropped to less than half of what it was just five years ago. Further, the Washington Post reports that the industry supports 17.5 million jobs that could be at risk, including cleaning and maintenance staff, property managers, and leasing agents. The same report from the National Council of State Housing Agencies estimates that America’s accrued apartment rent burden could result in up to $9.2 billion in reduced rental property payroll expenses allocated to those jobs. 

Clearly, both sides of the lease agreement have suffered major losses and continue to struggle in lieu of government assistance.  

 

How can I assess the impact on my properties?

Rental properties play a critical role in the broader economy. With economic uncertainty and evolving market conditions, you need to be able to keep a pulse on what’s going on. Real-time insights will enable you to quickly respond to change and minimize impacts to your portfolio and your revenue streams. With asset management software and tenant delinquency reporting, you can keep track of payments that have been received, are late, or are outstanding; compare current vs. prior tenant delinquency; and use historical data and forecasts to identify payment trends. This information can help you create an informed action-plan for outlining the next steps with delinquent renters. For example, for each delinquent household, consider whether that missed payment is a one-off happenstance or an ongoing trend. 

If you don’t already have a system in place to track and analyze this information, it’s not too late to implement a new technology and reap the benefits. According to research from Black Knight Financial Services, “The pace of recovery has slowed in the last three months, and if the current three-month trend continues going forward, it will take until March 2022 before tenant delinquencies return to pre-pandemic levels.” 

 

What actions can I take?

Federal, state, and local eviction moratoria provided a lifeline to millions of renters, but many have already expired or will soon. With these measures lifted, global advisory firm Stout Risius Ross estimates that 11.8 million to 13.9 million households are at risk of eviction within the next 4 months. But even when eviction is legal and possible, it may not necessarily be in your best interest. In the short-term, you face court costs and legal fees, turnover costs, vacancy, and the loss of a majority of rental arrears to a debt collector or third party. In the long-term, you may be missing out on viable income from tenants who have temporarily encountered hardship but otherwise pay on-time and are unproblematic. Consider some alternatives to eviction, including short-term rent reduction, deferrals, extensions, and due-date flexibility. These options will provide tenants with much-needed support while generating a stream of income, maintaining occupancy levels, and securing future earnings. 

Months have passed since the onset of coronavirus, and widespread uncertainty still remains. However, there’s light at the end of this long, dark tunnel. A McKinsey study reveals an economic outlook that is more positive than negative, with over half of survey respondents expecting improvements in the next 6 months. COVID-19 has also highlighted the role that CRE technology can play in taking back control of your portfolios and properties amid volatility and proactively taking measures to secure and generate future income. After all, rental property management is still a relationship business at its core, and that’s something that the ongoing pandemic won’t change. 

To learn more about managing tenant delinquency in the age of COVID-19, download this free best practice eBook!