At Issue VA - Evictions are Bad for Business

Reporting by media outlets often frames the eviction process as a tool utilized by housing providers to increase profit margins. But the data show that this framing is factually incorrect. Evictions are expensive for housing providers to pursue and represent a sunk cost that cannot be recovered. Therefore, it’s almost always more cost-effective to work with residents to keep them in place than to pursue eviction through the expensive and time-consuming court process. In short, evictions are also bad for business.

On Average, a Single Eviction Costs the Housing Provider in Excess of $10,000 

The eviction process is both costly and time consuming. Housing providers pursuing evictions see not only legal expenses associated with such a course of action, but also a loss of the revenue stream associated with a particular asset for the duration of the eviction process. Under the most efficient of circumstances, the typical eviction process takes about 60 days to full execution, and the cost of turning over a unit is roughly 2-3 months’ rent on top of the rent lost during the eviction process. The costs of turnover include cleaning, repairs, painting, carpet replacement, marketing, new resident screening, and other similar administrative items. A housing provider’s losses can continue to accrue beyond this average for each month that a unit sits vacant if not turned over immediately. Add legal costs into the mix and that means that a housing provider is deprived of between 40 and 50% of their annual income associated with a particular asset when they are forced to pursue an eviction.
 
Take the example of a two-bedroom apartment unit in Northern Virginia, renting at a market average rate of $2,364 per month. Upon a tenant failing to pay rent at the first of the month, a housing provider will typically provide a five-day grace period, followed by the required five-day “pay or quit” notice timeline before filing a motion for unlawful detainer. Optimistically assuming a 60-day timeframe from when the housing provider files with the court to when the eviction is executed, the process runs around 70 days from start to finish; and, in most cases, three months of unpaid rent. If the resident vacated the unit in relatively good condition (the best case scenario), the cost to touch up, market, and relet the unit will be approximately two-months’ rent. The final cost to the housing provider easily exceeds $10,000, even without accounting for legal costs:

It is often very difficult to collect on judgments for rent and other expenses owed in connection with an eviction, and many housing providers choose not to pursue collections. Housing providers fail to collect even a portion of the debt owed to them in more than 80% of cases. In short, there is no economic incentive for housing providers to file for eviction except as a last resort when a lease has been breached, most often for nonpayment of rent or for jeopardizing the safety or disturbing the quiet enjoyment of others at the apartment community. Instead, there is a powerful motivator for housing providers to work with residents to keep them in place where there is a reasonable expectation that they can get caught up and meet their financial obligations.

Evictions Make Housing More Expensive for Everyone

Lost revenues and expenses incurred due to eviction additionally make housing for other renters more expensive. Housing providers must protect other residents of the community and fulfill financial obligations, including but not limited to maintenance, capital improvements, mortgage payments, utilities, insurance premiums, payroll (housing providers employ 339,000 Virginians) and taxes, regardless of whether a resident fails to pay rent or fulfill other responsibilities under a lease.
 
And given the soaring costs of providing housing, margins are tighter than ever. The same way grocery stores adjust pricing to account for spillage and theft, housing providers have to allow for eviction costs. As rent represents the sole source of income for housing providers, the only way to cover losses is to reduce services or spread that cost amongst other residents in a community, driving rents higher overall.
 
It is extremely unlikely that rent paid by the next resident would cover the 5 months’ worth of lost rent from the eviction. Using the same example above, the rent would need to increase by $985 per month for a new tenancy to offset the cost of an eviction. Even if a resident leaves voluntarily, the housing provider still incurs the turnover costs. In this case, rent would need to increase by $394 per month to make bringing in a new resident the financially preferable option. It is highly unlikely that the market would bear out either scenario without a significant, and costly, investment in the unit. It is always preferable to work with a tenant to keep them in place where feasible.

Housing Providers Lead to Reduce Evictions, but Virginia Needs More Supply

The untold story over the past several years is that housing providers have actually led the way in efforts to reduce evictions and keep residents in their homes. Housing providers have voluntarily offered residents rent forgiveness, payment plan arrangements, financial counseling, technical assistance in seeking out and applying for rental assistance, and countless other endeavors. Organizations representing housing providers and real estate interests have also supported numerous policy initiatives to provide assistance to residents and lower eviction rates.
 
Unfortunately, more often than not, failure to pay rent is a result of persistent income shocks as opposed to a one-time, temporary setback. In fact, persistent income shocks contribute to a whopping 98% of eviction filings according to Matthew Desmond’s national eviction lab database. In such a scenario, it is rare that a resident is able to catch up to their financial obligations, which continue to accrue.
 
The fundamental problem is not greedy or punitive landlords, nor is it lazy or ill-meaning tenants. Rather it is the growing gap between the buying power of lower wages and the market costs of housing, established like any other service by the laws of supply and demand. Evictions are a symptom of larger societal issues directly related to a shortage of housing supply in the Commonwealth. As such, an effective long-term approach to reducing evictions must focus on the root causes of affordable housing supply, such as laws and regulations making multi-family housing more expensive to build and operate, and slow wage growth, particularly among lower income brackets where more than 80% of households are renters.

Without action, the projected supply and demand will continue to exacerbate affordability issues. As of the most recent Census, roughly 1 million Virginia residents make their homes in approximately 563,300 apartments across the Commonwealth. A recent report by the Joint Legislative and Audit Review Commission (JLARC) shows that Virginia needs 200,000 new affordable rental units to accommodate demand. National research shows that Virginia additionally needs to add 135,000 new market-rate apartment homes by 2030. This increased demand is fueled by an expected 16% increase in the number of households by 2030 and a higher propensity for Virginians to rent for the flexibility of employment demands, changing family dynamics, and economic reasons, among other factors. If we don’t take corrective action to create more housing supply now, our current housing affordability crisis will only worsen.

At Issue is compiled by the Apartment and Office Building Association (AOBA) of Metropolitan Washington, and is intended to help inform our elected decision makers regarding the issues and policies impacting the commercial and multifamily real estate industry.  
 
AOBA is a non-profit trade organization representing the owners and managers of approximately 185 million square feet of office space and over 400,000 apartment units in the Washington metropolitan area.  Of that portfolio, approximately 69 million square feet of commercial office space and 169,000 multifamily residential units are located in Northern Virginia.  Also represented by AOBA are over 200 companies who provide products and services to the real estate industry.  AOBA is the local federated chapter of the Building Owners and Managers Association (BOMA) International and the National Apartment Association.  
 
Along with input provided by AOBA member companies, the following data sources and references were used in compiling the attached report:  

• National Apartment Association’s 2021 Survey of Operating Income & Expenses in Rental Apartment Communities.  
• Dees Stribling.  “The Race is on Between Multifamily Rental Increases and Inflation.”  Bisnow National, December 20, 2021.  
• CoStar Commercial Real Estate Data, Information and Analytics Service.
• Eviction Lab national database, version 1.0.  Princeton University.  2018.
• State of the Nation’s Housing Report.  Joint Center for Housing Studies of Harvard University.  2020.    
• Affordable Housing in Virginia.  Virginia Joint Legislative Audit and Review Commission.  December 13, 2021.
• U.S. Census Bureau.  American Community Survey.  2020 Data.  
• National Apartment Association’s We are Apartments Data Set.  2017.

AOBA strives to be an informational resource to our public sector partners.  We welcome your inquiries and feedback. For more information, please contact our Senior Vice President of Government Affairs Brian Gordon at bgordon@aoba-metro.org.