The Supreme Court’s latest 6-3 decision to lift the nation’s eviction moratorium has been set in motion. The justices agreed that the current administration and Center for Disease Control and Prevention did not have legal authority to enforce a nationwide order without further authorization from Congress. After reversing course in early August, Biden told reporters he had consulted lawyers and understood that many legal experts believed his latest extension was “not likely to pass constitutional muster.” California’s moratorium is also reaching its third (and likely final) upcoming deadline next month. CA Governor Gavin Newsom extended the moratorium (subsequent to the delta variant surge) through September, which is set to expire beginning of October. In addition to extending the moratorium, the legislation cleared rent debt for low-income Californians who have suffered hardships during the pandemic. CA taxpayers (i.e. Assembly Bill 832) will also cover 100% of past-due and prospective rent payments, as well as utility bills, for income-qualified tenants (less than 80% of their area’s median income) from April 2020 through September 2021. Until October, a CA landlord may only evict a tenant for a legally valid reason. A tenant could be evicted during the moratorium if they break their lease, do something illegal on the property or the landlord must do necessary renovations. The moratorium is only for past-due rent payments.

Although the current moratorium protects tenants from being evicted, it doesn’t mean tenants don’t have to pay their rent. Come this October, landlords can begin taking tenants to small claims court for outstanding rent payments. What will this mean for distressed sellers that are “stuck holding the bag” and don’t want to chase tenants through court or take taxpayer dollars in the form of discounted rent collection settlements? We’re currently seeing an exodus of California property owners as they flock out of state into lower risk, passive NNN assets (many even striking sub-5% cap rate deals) in hopes of preserving their wealth (and mitigating further gray hairs) while having more certainty of rent collections from their tenants. While most market-rate renters (white collar with a “work-from-home” capability) have remained employed during the pandemic and continued making their monthly rent on time, some landlords catering to affordable and low-income housing have struggled to collect rent during the eviction ban. There are billions of dollars waiting on the sidelines and the “covid dip” was gone in a flash since the Federal Reserve printed money (i.e. quantitative easing) and purchased U.S. government bonds while keeping interest rates low in order to stimulate the economy. With the stock market at an all-time high, inflation heating up and interest rates set to tick up in the near future though, more of that capital might finally begin to be placed in multifamily, office, and retail throughout California (and similar states) by Q4 2021.

As schools are calling students back in the classroom, employers are also calling workers back into the office. Employees that are looking for apartments/condos closer to the office are now experiencing increasing apartment rents in major cities. Aging millennials have gotten used to the luxury of working from home (with no commute) and aren’t eager to sign long-term leases in urban areas. Further, median rent has risen more than 10% over the last year as well (according to Apartment List). Soaring housing prices (up 24%) are forcing many would-be home buyers out of the for-sale market, and they have little choice but to pay up in rent. To validate the influx of capital back into downtowns even moreso, smart capital is positioning itself for flex apartment leases in urban areas as employees ween off the “hub and spoke” model and return back to “the mothership.” Real-estate startup Sentral (with ties to Mark Zuckerberg & Reid Hoffman) currently manages 3,000 apartments around the nation and is rolling out technology allowing tenants to book furnished units for one night or for several years. Long-term residents can offset 25% or more of their total rent while they travel by using the firm’s technology to rent their apartment. On the other hand, though, some landlords are skeptical of the short-term rental due to the high turnover rate. So what does all this mean for urban investors ready to deploy capital into multifamily, retail, and office around major cities? Data from Trepp, CoStar, and other various commercial real estate research firms are showing that the hybrid work model (e.g. 3 days in office, 2 days from home) is here to stay for at least the next 12-24 months, while people are ready to get back to the city as businesses begin to re-open.

Guest Post

Viktor Simco: vsimco@lscapital.com

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