There may be a tsunami of evictions to come. The CDC’s series of eviction moratoriums has long since expired, and more than eight million Americans are delinquent on their rent. In other words, there is no longer a safety net from the government to keep people off the streets.
This should cause huge alarm bells to sound off for investors of Real Estate Investment Trusts (REIT). We expect apartment REITs to take the biggest hit, but other commercial REITs may also drop in value if there is a recession.
8.4 million Americans, or roughly 15% of all renters, are overdue on their rent and at risk of eviction because there is no federal eviction moratorium in effect. The latest statistics were part of a household survey performed by the Census Bureau between June 1 and June 13 and were first published by Bloomberg.
According to the poll, 3.5 million households had little chance of evicting them from their rental homes or apartments in the next two months. The majority of these people belong to the working poor class and reside in major metropolises like New York and Atlanta, where the cost of living has surged and includes things like fuel, food, and housing.
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In the past year, about 6.7 million households reported that their rent had increased by an average of $250 per month. Although the rise doesn’t seem like much, keep in mind that many of these people are suffering from the worst inflation in forty years. As incomes fall short of rising consumer prices, their credit cards are maxed up and their savings are depleted.
This startling discovery serves as a reminder that the current economic climate, which some have dubbed stagflationary, might swiftly turn into a recession and skyrocketing unemployment.
Who will the Biden administration hold responsible for the impending flood of evictions? He cannot continue to blame “Putin.”
REIT Investor Danger
Investors should be aware of the numerous risks connected to REIT investments. Brokers are required to disclose all risks associated with REIT investments when clients purchase REITs through them. The following are a few hazards connected with REITs:
Real Estate Market Risk
Real estate investment trusts are traded on significant stock exchanges and are impacted by changes in the value of the underlying assets. This implies that if investors sell their shares on the open market, they can get less money than they initially invested.
Recession, fluctuations in interest rates, natural disasters, etc. are a few examples of the sources of market risk. Market risk is difficult to remove by diversification since it frequently affects the entire financial market at once when any of the reasons occur.
We believe that the risk of recession and people not paying rent is the biggest risk to REITs right now. Investors should review their portfolios for any risks in this sector.
Initial liquidity risk
Public REITs permit shareholders to sell their shares on the open market, although they are less liquid than traditional investments like bonds and equities. The property has no secondary market where buyers and sellers can be found, and the only source of liquidity is the fund’s repurchase offers.
Additionally, there is no assurance that all shareholders selling their assets will be able to sell all of their shares—or just a portion of them—during the quarterly repurchase offers. Due to this liquidity risk, investors may not be able to sell their stocks for cash when they really need it.
Increase Leverage Risk
When investors choose to buy securities with borrowed funds, leverage risk is created. Leverage leads the REIT to pay additional costs and increases the fund’s losses in the event that the underlying investments perform poorly.
The amount of money available for distribution to the company’s shareholders will decrease due to the additional borrowing costs, such as interest payments and other fees associated with the borrowing.