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Apartment REITs Vulnerable to Pandemic’s Economic Fallout

National  + Weekender  | 

US multifamily REITs with high exposure to class B and C assets and properties in gateway cities—including Class A assets—are vulnerable to the economic fallout of the COVID-19 pandemic, due to risk of urban flight and high job losses among lower-income households, says Fitch Ratings.

In these lower-tier properties, sector performance has thus far been supported by federal stimulus payments and expanded unemployment benefits, given the essential nature of housing. However, larger than expected same-store net operating income (SSNOI) declines could pressure ratings.

Government-mandated moratoriums on evictions, high unemployment and lack of federal stimulus permanency are negatives for REITs’ top line. Tenant retention for properties in Fitch-rated REITs was in the 50%-60% range and rent collections at 96% to 99% during 2Q20. Occupancy was mostly above 95%, with renewals still positive. Rents have held up in the suburbs and coastal markets have not seen a shift to buying from renting due to still high home prices.

Job losses in the pandemic have been most prevalent among lower-income households. This increases risk for apartment REITs with sizable exposure to B/C assets in low-income neighborhoods, especially in a protracted economic recovery, says Fitch. Exposure to gateway cities, where the pandemic has an outsized effect due to density, is also a risk. Renters seeking more space as they work from home and Millennials entering a later stage in life may increasingly look to relocate to more affordable suburban and Sunbelt markets even after pandemic fears fade.

Accordingly, Fitch says, “outperformance of single-family rentals thus far may continue due to demographic and demand preference shifts.”

The growing evidence of urban flight increases the likelihood of concessions by A property classes in gateway cities as demand weakens and renewals slow. “Enduring geographic and age-related demand shift preferences by renters could limit longer-term growth rates in these assets,” according to Fitch. “Additionally, the secular tailwind of population growth in the 23- to 34-year aged renter cohort supporting urban gateway markets is expected to reverse in 2024.”

Fitch’s rating case assumes low-to-mid single-digit SSNOI declines for the apartment REIT sector in 2020 and 2021. “Negative new leasing spreads, delinquencies and occupancy declines will be a drag on revenue growth but fewer onsite hours, maintenance and repairs, over the near term, will limit expense growth to the low-single-digit range,” according to Fitch.

The ratings agency then sees SSNOI beginning to increase at a mid-single-digit rate annually in 2022-2023, “consistent with prior recoveries.”

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About Paul Bubny

Paul Bubny serves as Senior Content Director for Connect Commercial Real Estate, a role to which he brings 13-plus years’ experience covering the commercial real estate industry and 30-plus years in business-to-business journalism. In this capacity, he oversees daily operations while also reporting on both local/regional markets and national trends, covering individual transactions across all property types, as well as delving into broader subject matter. He produces 15-20 daily news stories per day and works with the Connect team and clients to develop longer-form content, ranging from Q&As to thought-leadership pieces. Prior to joining Connect, Paul was Managing Editor for both Real Estate Forum and at American Lawyer Media, where he oversaw operations at both publications while also producing daily news and feature-length articles. His tenure in B2B publishing stretches back into the print era, and he has served as Editor in Chief on four national trade publications. Since 1999, Paul has volunteered as the newsletter editor of passenger rail advocacy groups (one national, one local).

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