How COVID-19 Has Affected the Rental Market

The United States real estate market has been fairly turbulent over the last several months. This — of course — has been due in large part to the cross-market uncertainty wrought by the COVID-19 pandemic. Young families, retirees, and early career professionals have abandoned their NYC and LA apartments in favor of more land and lower purchase prices. This migration — which began before the crisis due to skyrocketing rent prices — has exploded as more Americans shift to remote work. Holds on evictions and stay at home orders across the country have also contributed to this change. They have highlighted the housing crisis in large cities — leaving many renters, landlords, and property investors in the lurch. Follow below to learn more about how COVID-19 has affected the rental market in particular, and how this trend may continue or revert.

How COVID-19 Has Affected the Rental Market: Debt and Changing Demographics

Unemployment and Rising Rental Debt

Much of the country reopened after the mandatory lockdown — with many Americans returning to work in either full or limited capacities. However — even after the nationwide reopening — millions have remained unemployed. In a recent Marketplace report, Samantha Fields wrote that while the unemployment rate has dropped, it still sat at “7.9% as of September.” This percentage equates to approximately “12.6 million people,” according to Fields. A recent Pew Research Center study — published in late September — found that one in four adults have struggled to pay their bills in full. This has been true since the COVID-19 pandemic struck the US in early February. From February to July, unemployment assistance totaling $600 extra weekly aided many. Unfortunately, that extra help has since dried up — with Congress failing to pass additional stimulus or unemployment assistance bills.

Kim Parker, Rachel Minkin, and Jesse Bennet explain the financial impact of the pandemic in their article “Economic Fallout From COVID-19” for the PRC. Parker, Minkin, and Bennet write that the new survey has revealed “a third [of American adults] have dipped into savings or retirement accounts.” They have done so “to make ends meet” since the COVID-19 pandemic began. One-third of American adults — “32%” — has also struggled “to make rent or mortgage payments.” The writers continue on to note that “about one-in-six have borrowed money from friends or family or [had] gotten food from a food bank.” The loss of income and mounting debt resultant from the pandemic’s impact on the American economy has had horrific effects on the disadvantaged. Parker, Minkin, and Bennet write it has most severely affected “adults with lower incomes, those without a college degree and Black and Hispanic Americans.” 

Jacob Passy explains in “Here’s how much Americans will owe in unpaid rent” for Market Watch, that owed rent has compounded the housing crisis. Passy writes that researchers from the Federal Reserve Bank of Philadelphia “estimated that by December around 1.34 million renter households” will owe back rent. This debt has accrued as a result of “pandemic-related job losses.” This number of renter households “equates to roughly 4.2% of all renter households.” The total back rent owed by December could be around “$7.2 billion…averaging to around $5,400” per household. 

How Mass Migration Could Cause a Housing Crisis — During the Global Coronavirus Pandemic

A change in demographics could affect housing in the long-term. The recent Federal Reserve Bank of Philadelphia study mentioned above found that 12.8 million Americans have been affected thus far. This number has far outweighed the number of people displaced during the mortgage and general housing crisis of the 2007/8 crash. However, the two crises are not substantially comparable. Instead of a bursting bubble and plunging home values, during the COVID-19 pandemic housing prices have actually continued rising as Americans have moved in droves from the city to the suburbs — where prices have skyrocketed.

This has meant a banner year for suburban sellers. However, it has produced complicated fallout in urban areas where renting is more common than owning. Urban areas have experienced a precipitous — and not yet lifted — collapse in rental prices since mid-March. The collapse was spurred by two elements. First was the lack of tenant ability to pay their rent. The second was the lack of legal recourse available to landlords as mandates halted the right to evict tenants unable to pay their rent. As these mandates fizzle and disadvantaged renters are once again on the hook for missed rental payments, a wave of evictions is expected. This wave is anticipated to result in a massive increase in homelessness — particularly for families with children — in major cities. Suddenly, thousands of units will become empty, and — with many wealthier renters having moved away from urban areas to the suburbs — these units might sit empty for quite a while until landlords lower rent. 

How the Rent Payment Gap Might Affect the Rental Market in 2021

As cities around the world revert to more restrictive coronavirus restrictions — non-essential business shutdowns, lockdowns, and quarantines — in late 2020, many health experts expect cycles of such restrictions to continue well into the following year. Positive test rates, hospitalization rates, and death rates have all climbed in recent weeks across the US, encouraging states like Oregon, Washington, California, and even Texas to consider travel bans and other more restrictive measures. As the impacts of COVID-19 will still be felt in 2021, the shift in the trajectory of the rental market is expected to continue. Real estate market experts anticipate rental rates in urban areas will continue to drop into 2021. However, they expect suburban rental rates to continue to increase. This is due largely to the growing desire of Americans to be surrounded by green space, more square footage, and family-friendly environments. 

Investors now have the opportunity to produce exciting and fairly sustainable windfalls in both long-term and short-term rental income. Rents in suburban and bedroom communities have increased substantially as cities have emptied out. This shift in value from urban areas to bedroom communities has turned single-family houses, townhouses, and small apartment buildings into incredible investment opportunities. Learn more about how to adjust your business — or investment portfolio — in light of COVID-19 and its effects on the rental market through the article and podcast episode “Become a Millionaire Through Real Estate Investing (Post COVID-19)” by Connected Investors.

For help understanding these recent changes — and to connect with other investors and industry professionals — reach out to the team at Connected Investors.