January 13, 2021, Les Shaver, GlobeSt.com - In 2020, urban areas suffered as people left for more space in the suburbs, exurbs or smaller cities. With this migration out of cities, high-quality downtown apartments and those located in larger tier-one markets have suffered higher levels of rent losses relative to the broader market, according to CoStar.
While lagging demand during the pandemic has been an issue, strong supply in these urban areas has also taken a toll on the apartment market. This was especially notable in markets where work-from-home became prevalent.
As Andrew Rybczynski, a managing consultant at CoStar Group points out, this migration of people out of urban areas hit the average rents of many public apartment REITs, who have a lot of exposure to downtowns and core markets like New York and San Francisco, especially hard.
While REITs struggled, lower-quality apartments, which CoStar refers to as 1- and 2-star buildings, owned by individuals outperformed higher-quality buildings because they faced less supply pressure. Additionally, CoStar says regional owners and developers had the most diverse aggregate portfolio and suffered the least rent losses of institutional owner types.
While it may look like less sophisticated apartment owners are outperforming their more institutional competitors, Rybczynski says the results should be taken with a grain of salt.
“I would argue that it is a very short timeframe to compare,” he says. “It definitely worked out well for them [smaller owners] last year, but there is an argument to make that over a longer timeframe, the performance wouldn’t look as good.”
The good news for REITs is that things did begin to turn around slightly in the fourth quarter. “It’s not back to where we were compared to Q4 in 2019,” Rybczynski says.
But CoStar is forecasting 2021 to be a slightly better year for downtowns. “We’re forecasting a slight improvement in rent growth,” Rybczynski says. “On the aggregate, we are still actually calling for slight rent loss. Our demand forecast is actually not that strong for 2021.”
The reason demand isn’t picking up that much? It’s the employment market, according to Rybczynski.
“The employment market is not recovering as quickly as it had been,” he says. “But I do think that there’s some upside there to surprise a little bit in 2021. I also think that there may be a little bit more demand for apartments versus homeownership, given that it tends to be easier to rent a home versus to buy a home in tough economic conditions.”
While 2020 was a scalding hot home-buying market, Rybczynski thinks it was driven by more than just people moving out of cities.
“I do think that the home pricing is as much a function of mortgage rates as it is of demand,” he says. “We did have very strong demand for homeownership in 2020.”