Coastal Apartment REITs Fall Victim to Delayed Return-To-Work Timing

The outlook for coastal apartment REITs has lowered as uncertainties around COVID-19 vaccine distribution continue, case counts tick up, and return-to-work plans are increasingly delayed.

While coastal apartment REITs have been among the better performers in “riskier” sectors since November, a new report by Mizuho Securities predicts downside risk to return-to-work timing. The report forecasts a return-to-work (and a corresponding increase in demand and rents) in September or October 2021, a timeline adjusted from previous May/June estimates that assumed coastal CBDs would stabilize by the fourth quarter of 2020 or first quarter of 2021. 

The likely delay in return-to-work could negatively impact both CBD market demand and stock prices for coastal apartments, with Sun Belt markets potentially performing better in the near term.

Despite continuing volatility and near-term earnings risk, however, Mizuho analysts remain constructive on – and think investors will continue to remain comfortable with –coastal apartments, thanks to clear public-vs.-private market discounts on offer and little concern about the sector’s relevance in the long term. Coastal apartment REITs will likely use concessions to maintain occupancy into the later part of 2021, with occupancy expected to climb slowly into 2022.

Apartment REITs with a high-income resident base have seen collections between 97 and 98% since March 2020, only a small decrease over historical norms, according to Morningstar. Yet that small decline, coupled with decreased occupancy and higher rent concessions, will likely lead to a low-single-digit revenue slump for the sector. 

In general, values for apartments are increasing, according to Real Capital Analytics.  At the end of last year, RCA data showed that annual returns for the sector have clung to the mid-7% range, while research from Yardi Matrix notes that falling Treasury yields have given buyers a hefty premium over the risk-free rate and cost of debt – even as cap rates are at historical lows.