Apartment Owners Struggle to Pay Loans As Rent Stops Coming In

As renters struggle to make monthly payments due to the economic impact of the coronavirus pandemic, apartment owners are starting to feel the squeeze. 

Owners of multifamily apartment buildings are falling behind on loan payments. Building income for some has been insufficient to cover bank loan payments due to the federal eviction moratorium and “tenants not paying rent,” The Wall Street Journal reported. The Biden administration proposed continuing the current eviction and foreclosure moratoriums, which are scheduled to end in March, through September. 

During the pandemic, the percentage of total apartment debt that banks placed into their highest-risk categories has jumped to 16.9% from 4.6%, according to market intelligence firm Trepp. 

Developers of new apartment buildings are even more vulnerable, since they must fill units as many renters are choosing to leave the city to buy homes in the suburbs or look for apartments in lower cost of living places. Sales of U.S. apartment buildings fell 28% last year, the worst result in six years, according to data from Real Capital Analytics.

Because few lenders are available to help these struggling developers, some have turned to investors offering builders short-term, high-cost loans to sustain their operations until the pandemic ends.

Still, some real estate industry experts believe apartment owners are better positioned to survive this recession than the last one, largely due to their relatively low levels of debt. In addition, experts say banks might be less willing to foreclose on delinquent apartment owners than owners of retail properties due to the belief that apartments are good long-term investments, while brick and mortar stores are outdated.

Real Estate Investment Trusts (REITs) with exposure to the U.S. residential apartment rental market have been among the worst sectors of the stock market for the past year. AIMCO, which was moved out of the S&P 500 Index last year to make room for Tesla, saw its shares plummet in 2020, while competitors Equity Residential and Avalon Bay are down 20% or more in the past year. This is in contrast to home builders like Toll Brothers and KB Homes, which hit record highs last year.