Market Dislocations: Rent

March 31, 2020

Rent is Due

There are many market dislocations to be wary of in the coming weeks and months, and paying rent isn’t one that is normally considered.   For the vast majority of individuals and businesses, rent payments happen every month on time.   This dislocation will be unprecedented and the difficulties that will ensue will be hard to evaluate.

The headline number of $22 billion mentioned here represents rent, but there are also mortgages by homeowners that need to be paid and given the reported interest in deferrals, that will be very, very difficult for many homeowners.

US Landlords Collect $81 billion in rent in a typical month according to Bloomberg research, and about $22 billion of that is for apartment dwellers.  With corporations and individuals suffering from lack of income, some are currently unable to pay that rent.  The problem is likely to get worse.

With about 44 million occupied rental units in the US, the average rent for a consumer is about  $500/mo.

The headlines only capture those who are willing to discuss their situation though, the sheer size of the market gives a good indication of the larger problem.   Last year, Barney’s, a clothing retailer declared bankruptcy and there is speculation that the doubling of their rent was a key reason.   Behind these numbers are landlords, many of them operating on thin margins after purchasing large portfolios of property during heady times.   As the strains on their tenants mount, the risk of strain spreading to the landlords, and ultimately their lenders mounts.

Some of that strain became evident last week, just three weeks into this crisis.  A component of the $2 trillion stimulus announced by the Federal Reserve, was allotted to support mortgage securities, but with a total market size of over $10 trillion, it may not be enough.  The uncertainty could be made clearer if you consider that we are in the first month of a crisis that has an unknown end date.

While it is harder to get detailed data on the Canadian rental market, the Canadian MBS market is about C$500 billion in size.   Canada did not have the same fallout as the US during the 2007-2009 market decline, so real estate prices are considered to be more overvalued.  This increases the downside risk if home values and rents were to return to long term averages.  Many studies have suggested that housing prices in Canada’s major markets are some of the most over valued in the world.  The Economist has suggested that houses are about 40% overvalued and consistently questioned whether Canadian prices are sustainable.  If they are not sustainable, then there may be significant pain for heavily indebted homeowners and landlords.

What can you do?

  • Contact your landlord or lender and work to defer payments if cash is not readily available.   Even if you have cash, you can apply it later to outstanding balances, so working to conserve cash now will provide flexibility while this crisis unfolds.



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