D.C.'s Extended State Of Emergency Policies Adding Hurdles To Struggling Apartment Market
The drop in rent collections and leasing demand has created a difficult landscape for D.C. apartment owners this year, and D.C. policies responding to the pandemic appear to be making it more challenging.
Mayor Muriel Bowser Wednesday extended D.C.'s State of Emergency until Dec. 31, meaning many of the order's temporary policies affecting the housing market will have been in place for at least nine months.
The order has banned apartment owners from evicting tenants for nonpayment of rent or other lease violations. It has instituted a freeze on rent increases, including for vacant units. And it has delayed the Tenant Opportunity to Purchase Act process in a way that brokers say has stalled the apartment sales market, further depressing city tax revenues.
Apartment owners say these policies are restricting their ability to maintain sustainable business operations at a time when market forces are also working against them.
"Small landlords are being hurt right now by increased rent delinquencies and higher vacancies because students aren't here, and other people who would be working in D.C. aren't here," Small Multifamily Owners Association CEO Dean Hunter said. "They're getting squeezed on both ends. They have tenants not paying rent and units that are vacant."
Rent collections in the D.C. area for the first week of October stood at 84.2%, according to RealPage data provided to Bisnow, down 3.3% from the same period last year.
The region's net absorption of apartments in Q3 was 673 units, according to RealPage, down from 4,495 in the same quarter last year. Average rents for all D.C. area apartments fell 3.2% last quarter, according to RealPage, and rents for Class-A apartments fell 6.1%.
RealPage Market Analyst Adam Couch said D.C. is typically in the top 10 in apartment demand among the 50 largest Metro areas, but last quarter it was in the bottom 10. He said metro areas with higher-than-average rents have been particularly hurt by the crisis as people have had the flexibility to move to cheaper locations.
"Demand is significantly lower in the D.C. area, that's why rents and occupancy have fallen so much," Couch said. "At the same time they're having to deal with supply concerns. It has been a huge gateway Metro with a lot of investment activity and construction."
Acumen Cos. Chairman Abiud Zerubabel, whose firm owns a large portfolio of D.C. apartments, said he has had tenants move out of the District and has had trouble filling the vacant units.
"After stimulus expired, a lot of tenants elected to vacate or go back to their parents' house or to a different property, so we've had some vacancy kick in," Zerubabel said. "We noticed there is a massive demand move from the urban community in D.C. to Alexandria, Bethesda and other submarkets that give you more space."
"There are certain luxury projects we have where folks have more flexibility so they may choose to leave the region for another location because they can telecommute, they may go home to see family or other places to become a digital nomad," Lynch said. "That's affecting renewals as well as leasing."
These strains on apartment owners' finances are being exacerbated by the city's State of Emergency policies, landlords, brokers and policy experts say.
The emergency extension has continued the city's eviction moratorium, a policy that prevents landlords from evicting tenants for nonpayment or other lease violations.
National Multifamily Housing Council Vice President Paula Cino said the organization opposes eviction moratoriums because they leave apartment owners without an an ability to pay their obligations, such as payrolls, taxes and mortgages.
"Eviction moratoriums are unsustainable, they don't address a renter's financial distress, and they ignore the financial realities of property owners of all sizes," Cino said.
She said the organization especially opposes moratoriums like D.C.'s that don't allow landlords to evict tenants for other lease violations that aren't related to nonpayment because that restricts their ability to keep their properties safe.
"D.C. has had one of the earliest and longest moratoriums, and it is more rigorous compared to what we've seen in other localities," Cino said.
Instead of eviction moratoriums, she said NMHC supports jurisdictions providing direct relief to renters so they can pay their monthly bills and landlords can pay the parties to which they owe money.
Hunter also said his group of small landlords opposes the portion of the eviction moratorium that prevents landlords from evicting tenants for lease violations other than nonpayment of rent, and he would prefer the city focus on rent relief.
"We believe landlords should be able to evict for health and safety reasons," Hunter said.
D.C. Policy Center Executive Director Yesim Sayim Taylor said the data shows the vast majority of eviction cases have involved nonpayment of rent.
"Landlords are not happy with the extension of eviction to all causes, they want to still be able to continue with eviction if the eviction relates to drug use or unacceptable behavior, but the data shows that is a small portion of tenants," she said. "Most tenants are evicted for nonpayment purposes."
D.C. Office of the Tenant Advocate Legislative Director John Cohn said the eviction moratorium covering all lease violations is an important way to protect renters.
"When you're dealing with nuisances created by tenants there are likely other resources available, and when you talk about evictions, very often we see mischief and potential abuses of the eviction action," Cohn said. "You don't want, as a public policy matter, to have a tenant be subject to an eviction during a public health emergency."
The District's State of Emergency policies also include a rent freeze that prevents landlords from increasing rates, even when backfilling a vacant unit.
Hunter said he sees this as the biggest issue with the temporary policies. He said it particularly hurts small landlords with rent-controlled units who are typically allowed to raise rents by a certain percentage each year or when a tenant vacates because it now forces them to keep renting their units at the level the previous tenant paid.
"The larger issue is not just that they can't evict, the larger issue is that they can't raise rent on vacant units," Hunter said. "You have landlords already hurting with delinquencies, they're hurting with vacancies, and they can't raise rent on vacant units."
Taylor also said this policy is creating challenges for landlords because they are having to pay higher expenses for pandemic-related precautions and aren't able to increase rents to cover those costs.
"Especially for rent-controlled units, every year they can increase rent once, so if they forgo that, they're losing one year of revenue growth, and what landlords are saying is their costs are increasing much faster with all the precautions they have to take," Taylor said.
Cohn said the rent freeze includes vacant units because many renters are struggling financially and may not be able to find a home they can afford.
"We had a crisis of affordable [housing] in D.C. leading into COVID, and we have a lot of tenants now who are at risk of being evicted and a pool of folks at risk of not being able to pay rent that is far more expansive than anything we've ever seen," Cohn said. "The policy rationale for the freeze on rent increases is that we need to preserve as much housing affordability as possible."
Changes to D.C.'s Tenant Opportunity to Purchase Act during the pandemic have made it nearly impossible to buy and sell apartment buildings, brokers say.
The TOPA law, which gives tenants the ability to organize and offer to buy their building when a landlord is looking to sell it, typically makes apartment sales take longer than in other jurisdictions.
But now, the process is taking much longer because all deadlines for tenants to exercise TOPA rights have been paused until 30 days after D.C.'s State of Emergency Order is lifted.
Cohn said the rationale for this pause was that the health crisis made it unsafe for tenants to meet in person to organize, restricting their ability to exercise their TOPA rights.
"When the residents of a larger building in particular, but any multifamily building, get that TOPA offer, it becomes that much more difficult for tenants to exercise rights meaningfully if there are public health restrictions on their being able to get together and organize and discuss and meet with attorneys," Cohn said.
Greysteel Senior Associate Nigel Crayton, an apartment investment sales broker in D.C., said the only sales that have been able to close are for vacant buildings, and the majority of deals remain stuck.
"A lot of deals we're working on have been caught up and owners are upset because they're holding onto an asset that's underperforming, and they can't do anything about it," Crayton said.
He added that this is particularly harmful for small landlords who may be facing economic challenges and need to capture the proceeds from selling their building.
"There have been a lot of landlords negatively affected," Crayton said. "They may have family members sick or they're sick, and they're not able to pay their debt and are unable to sell a property that is an asset they own that would help to solve these issues because of the TOPA time frame."
Melnick Real Estate Advisors founder Scott Melnick said these additional TOPA delays are pushing apartment investors away from the District. He said this is especially the case for buyers utilizing the 1031 Exchange program because of its deadlines that must be met.
"TOPA is slower and harder now, so for a 1031 exchange buyer, they don't even want to look in the District because you have certain time frames," Melnick said. "So that stops a good subset of buyers in the market today from even looking at acquiring properties in the District, because you can't work within that time frame."
Taylor said she has heard multiple instances of affordable housing nonprofits unable to buy apartment buildings they were looking to preserve as affordable because of the TOPA delays.
"TOPA has already slowed down sales, and basically it's just going to stop sales at this point," Taylor said. "Everybody's burning with this — it's not just the caricature of a landlord. If you're a nonprofit trying to buy a building with TOPA rights and turn it into affordable, you can't do it anymore."
The slowdown in apartment sales reduces the amount of tax revenue D.C. collects, worsening its budget crisis. D.C. Chief Financial Officer Jeffrey DeWitt last week decreased the projected revenue from deed taxes for this fiscal year by $93M, attributing it to the drop in multifamily and commercial property sales.
“It’s bad for the city because of tax reasons," Crayton said. "If there’s a big dip in multifamily sales that are able to happen because of the TOPA time frame, they’re losing a lot of money from the transfer and recordation tax.”
The city's revenues are not just hurt by a slowdown in sales, but by a drop in the value of apartment buildings. Taylor said the higher vacancies and lower rental rates created by the pandemic can lead apartment building property values to fall.
"The taxable assessment of multifamily buildings is also declining because of COVID and the [State of Emergency bill]," Taylor said. "COVID was already killing it, the vacancies have nothing to do with legislation, but the pressures from the bill that reduce rent revenue will also be an additional negative shock."