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Urban Flight Affects Earnings For Apartment Owners

Urban Flight
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EDITOR NOTE: Real estate investors with large exposure to urban retail and residential properties are largely hurting as “urban flight” intensifies amid a second COVID surge and prolonged unemployment. Some analysts say that third-quarter GDP may still reflect the previous stimulus effects, and that Q4 GDP may be more telling as to the state of the economy without the fiscal price distortions. Regardless, a second wave of coronavirus makes densely-populated cities unattractive to most dwellers who have the means to live elsewhere. Rental demand, in other words, is likely to continue to see declines in the months ahead.

Decidedly weak quarterly earnings reports from major apartment real estate investment trusts this week paint a bleak picture for some of the largest urban rental markets. The coronavirus pandemic has caused thousands of apartment dwellers to seek safer, larger, single-family suburban homes, causing vacancies in high-rise rental buildings to spike.

Equity Residential, whose portfolio consists mostly of mid- to high-rise buildings on the East and West coasts, saw a particularly bleak third quarter. Its stock is down about 43% year to date. Occupancy and average rent rates fell and will likely drop further in the coming quarters.

Nearly a quarter of its holdings are in downtown San Francisco, Manhattan, Brooklyn, New York, Boston and Cambridge, Massachusetts. Those are the markets most impacted, as they have seen large outflows of tenants moving either to smaller cities or the suburbs. As businesses reopened over the summer, there were some improvements, but no guarantees.

“We have seen scattered positive signs in the form of modestly improved renewals and higher application volumes,” said Equity Residential’s CEO, Mark Parrell, on a conference call with analysts. “I caution, however, that market conditions remain too volatile and the timing of developments on mitigating the virus too unclear to suggest that we have turned a corner.”

The company did not release any earnings guidance, but Parrell added, “We do want you to be aware that our financial results will weaken over subsequent quarters, as the full impact from the pandemic works its way through our rent roll.”

AvalonBay, which has a similar geographical mix to Equity Residential, also posted disappointing earnings for its third quarter and also did not provide any guidance. Its stock is down about 35% year to date.

“The adverse future impact of the pandemic on the Company’s results of operations cannot be reasonably estimated, and could be material,” according to AvalonBay’s earnings release.

While it is impossible to get firm numbers on the much-discussed urban flight phenomenon, analysts say it is clearly in the earnings numbers.

“The proof is that rents are down double digits, plus the AvalonBays and Equity Residentials of the world are offering 2-months free on top of that in the major Coastal Urban Markets,” said Alexander Goldfarb, a REIT analyst at Piper Sandler. “When DC, long a laggard, and Baltimore are the best relative apartment markets for companies like Equity Residential and AvalonBay, you know things have changed.”

While there has definitely been some bargain hunting among tenants in large cities, Equity Residential noted clearly on the call that it is not losing tenants to competitors. Its residents are relocating.

And that may benefit REITs in the Sunbelt, where Northeasterners are moving. Camden Property Trust, based in Houston, is seeing far better results and less impact from the pandemic. Its holdings are in Texas, Florida, Georgia and North Carolina. Its stock is down just 16% year to date.

Essex Property Trust, despite being largely in California and Seattle, has just 10% of its portfolio in urban cores.

“Its limited (10%) exposure to urban markets is proving its worth, in that occupancy is flat year-over-year, at 96% overall. That said, Los Angeles and San Francisco showed occupancy losses, which drove revenues down double digits in the quarter,” added Goldfarb. Essex’s stock has fallen 34% year to date.

Originally posted on CNBC

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