Publicly traded multifamily REITs reported declining rents and occupancy during the third quarter. Negative new lease rental growth rates first reported in the second quarter have translated into negative year-over-year average rental rates for most portfolios. New York City, Boston, San Francisco, and Los Angeles suffered the sharpest declines, while suburban and sunbelt markets continue to perform relatively well.
The Pig is in the Python
Pandemic related closures, restrictions, and work from home policies have encouraged many residents to reevaluate their housing choices. REITs reported this has led to higher then normal levels of lease turnover and declining occupancy, forcing them to offer elevated lease concessions to maintain occupancy.
During the second quarter, a majority of multifamily REITs reported negative new lease growth rates but positive year-over-year average rental rate growth as a relatively small proportion of their rent roll had turned over. During the third quarter however, continued negative new rental growth rates and weak renewal pricing resulted in most REITs reporting negative year over year average rental rate growth for the period.
EQR reported year-over-year same-store rent declined by 3.2 percent, driven by new lease rates declining over 13 percent. EQR reported new lease rate declines of over 20 percent for their New York City portfolio and that they were “still seeing residents leaving the city to wait the (pandemic) out.” During the quarter they detailed New York City “leasing activity was primarily driven by deal seekers.”
EQR further cautioned that “financial results will weaken over subsequent quarters as the full impact from the pandemic works its way through our rent roll…As the composition of our rent roll changes to include more lower rate leases, our same-store revenue results will decline.”
Only, CPT, IRT, and MAA reported positive year over year average rental rate growth for the third quarter. Roughly 20 percent of CPT’s portfolio is located in California and Washington D.C., the balance, like IRT and MAA’s portfolios, is located entirely in the Sunbelt.
Suburban Continues to Outperform
MAA stated that throughout their portfolio “suburban is running stronger than Urban, and Class A price points are running a little weaker the Class B price points.” Further, occupancy in efficiency floorplans was slightly below their portfolio average.
Likewise, AVB reported similar demand preferences for larger, less dense properties: “the appeal for urban living is for the time being diminished due to the health concerns of living in a dense urban environment.” They further remarked that two suburban New England, townhome lease-up properties were outperforming pro forma expectations. Overall AVB reported the sharpest new lease rent declines were in their metro New York and Northern California portfolios.
Job Growth, Return to Office Key to Recovery
Across the board, REIT managers identified a return to the office and robust employment growth as the keys to recovery. A return to the office would no doubt help core urban properties, but suburban properties as well. ESS pointed to their San Jose / South Bay portfolio. Despite a suburban footprint it was one of their weaker performing marketplaces. Given the area’s high-tech employment base and corresponding robust work from home policies, a sizeable portion of their residents were seeking living arrangements outside of the area for the time being.
ESS does not publish market level new lease rent growth statistics, but Yardi Matrix estimates of ESS’s same-store rent data confirm that new lease growth rates for ESS in the South Bay marketplace came in at a negative 6.4 percent for quarter three. Likewise ESS’s second worst performing market, according to Yardi Matrix same-store estimates was Los Angeles at a negative 6.6 percent. ESS remarked that pandemic related shutdowns had hit the content creation and entertainment industries centered in Los Angeles particularly hard and a return to full employment in this marketplace would shore up lagging occupancy, rent collections, and rent growth.
Despite a comparatively strong quarter, MAA reported they “were keeping an eye on” the energy dependent Houston marketplace as well as tourism dependent Orlando. According to Yardi Matrix estimates, MAA’s Houston same-store portfolio new lease rent growth was down nearly two percent, while in Orlando it was down over 4.25 percent.