Apartment REITs Report Falling Occupancy For Q3

There was some news that on the surface was bad for major apartment REITs, according to Trepp’s Commercial Real Estate Direct: occupancy rates declined in the third quarter.

“The occupancy decline – the 13 companies had a weighted average decline of 0.35% from the second quarter and a 0.61% drop from last year’s third quarter – was no surprise as they all pushed rents higher,” said the report. “Those rents increased by a weighted average of 13.05% when compared with last year. The higher rents could be driving some tenants out of individual units and forcing them to double up or move to cheaper locations.”

The quarter-to-quarter percentage point changes topped out at 1.7, which was for Apartment Investment and Management Co., across 5,542 units in major markets. NexPoint Residential Point, 13,930 units in the Sun Belt, saw a 1.3 percentage point drop, as did Independence Realty Trust (33,804 Sun Belt units), and Veris Residential (6,931 in New Jersey). After them, the drops were below 1 percentage point each, down to number 12, Essex Property Trust, with a 0.1 percentage point decreases across 62,000 units in California. The last REIT on the list, Mid-America Apartment Communities and its 101,769 Sun Belt units, saw a 0.1 percentage point improvement in occupancy.

According to Trepp, the REITs that had the largest average rent increases also saw the largest occupancy declines.

“For instance, NexPoint Residential Trust Inc. of Dallas, which owns 13,930 units in the southeast and southwestern United States, reported a 19.4% increase in average rents [quarter over quarter] in the third quarter from the second,” said the report. Apartment Investment and Management hiked rents almost 6.6% between Q2 and Q3. Apartment Income REIT, Mid-America Apartment Communities, and Veris Residential, the former Mack-Cali Realty Corp., monthly rents increased respectively by 5.8%, 5.6%, and 5.5%.

But, if the rents can hold, the occupancy decreases probably don’t matter. Take Independence Realty Trust, with a 4.8% average rent increase between quarters and an occupancy that went from 95.5% to 94.2%. Average rent went from $1,412 to $1,479 on 33,804 units. Like the other examples, the occupancy decrease was completely overshadowed by the rent increase. In a given month, income was number of units times occupancy times average rent. During Q2, that would be 33,804 units time 95.5% occupancy times $1,412, or roughly $45.48 million. In Q3, it was 33,804 times 94.2% occupancy times $1,479, or $47.10 million.

This becomes like a classic pricing problem in other types of business, where a pricing hike that causes a loss of some customers may still increase income. But as the report notes, the pace of rent increases is slowing: “For instance, rents had increased by an average of 5% in October under new leases signed by Camden Property, Essex, Equity Residential, UDR Inc. and Mid-America. That compares with a 13% average growth rate for the five companies in the third quarter, according to data compiled by John Burns Real Estate Consulting.”