Previously we described that over 30% of US renters didn't pay their April apartment rent as the fallout of coronavirus-induced mass unemployment claims continues to ripple across various key sectors. Despite that some tenants will receive temporary protection from evictions "by a patchwork of federal and local laws" the reality is that as unpaid rents pile up, so will mortgage defaults as landlords struggle to satisfy their obligations - which will in turn affect fixed-income investments backed by said mortgages.
On the commercial side, Bloomberg estimates that about $81 billion in commercial rent comes due on average each month, but of course this is anything but a typical month, resulting in "The delay of a sizable portion of that will put an enormous strain on the complex systems for financing real estate and highlight how quickly the pain caused by social distancing has spread," as Bloomberg observes.
The domino effect presents the broader question of not only carnage across real estate financing, but lasting pain felt for the individual home-owners: "It won’t be much better for homeowners. Roughly 15 million households — about 30% of mortgage borrowers — could miss payments if the economy stays shuttered through the summer, according to Mark Zandi, chief economist at Moody’s Analytics."
The report casts a dire long-term outlook, underscoring that local, state and federal initiatives to temporarily halt all foreclosures and evictions will not be enough based on a policy aimed at "pausing" punitive measures a mere month or two:
“The initial thinking behind it seems like it was that this is going to last a month or two, and things will go back to normal,” says Tomasz Piskorski, a professor at Columbia Business School, who favors forgiving some interest payments for affected mortgage borrowers. “It buys us some time. But it’s going to take months or years to get back to a new normal.”
But Americans will have to pay the piper eventually even if in this crisis they perceive that 'everyone is blameless'.
"Rents must be paid eventually, and landlords will have claims even in bankruptcy. In cases where businesses shut down because of government order, tenants will pursue claims of force majeure, arguing that their contractual agreement has been superseded by social-distancing decrees. Landlords may make the same case to lenders," Bloomberg describes of what's coming.
But the music has to stop somewhere.
"The blameless nature of the crisis could make some problems easier to solve, lowering resistance to government bailouts. A bigger challenge may be mustering a strong response during a crisis in which officials worldwide have repeatedly been slow to take decisive action."
“It’s almost like we’re watching this unfold in slow motion,” Scott Rechler, CEO of RXR told Bloomberg. “We know the bad part is coming, but we don’t know how long it will last or how resilient we’ll be.”