29 September 2020

Stock Investors Stay Bearish on Apartments

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Apartment owners who have been regularly reporting rent collections from more than 90% of their tenants seem to be weathering the pandemic better than landlords of malls and hotels.

But Wall Street isn’t buying it. The FTSE Nareit Equity Apartments index, which tracks the stock prices of publicly traded apartment landlords, is down more than 21% year to date.

A big reason: Dramatic cuts in rents in coastal cities like San Francisco and New York City by landlords like Equity Residential and AvalonBay Communities Inc. have sent shudders through the market.

In New York, for example, asking rents for apartments owned by publicly traded landlords have fallen by about 15% since August 2019, according to Green Street Advisors. That figure doesn’t include the full impact of concessions, like months of free rent.

Landlords in these hard-hit coastal markets haven’t suffered large spikes in vacancy, but that’s largely due to the rent cuts. “They’re effectively buying occupancy,” said Haendel St. Juste, a real-estate investment trust analyst at Mizuho Securities USA.

To be sure, markets in some regions—like the Sun Belt—don’t look as bleak. Suburban rents are holding up better than urban rents on average, according to a recent report from Zillow. And values of rental buildings, especially those with more affordable rents, remain solid in the private market.

Mid-America Apartment Communities Inc., which owns many Sun Belt and suburban apartment complexes, reported that its July leasing volume was on track to surpass the same period in 2019, with suburban activity being particularly strong. Similarly, Equity Residential reported that the percentage of suburban tenants renewing leases is higher than at the company’s urban properties.

But the pandemic and the recession are clearly taking somewhat of a toll on suburban and Sun Belt apartment buildings. A Green Street analysis found that rents at buildings owned by publicly traded apartment landlords were still falling in most suburban markets, albeit less sharply than the rent declines in the corresponding cities.

Asking rents in Bay Area cities fell 9% through the month of July; they slid 6% in Bay Area suburbs. In Sun Belt suburbs—such as those around Atlanta, Dallas and Orlando—rent growth was flat or positive.

Pessimistic stock investors are worried that the dramatic downturn of markets like New York and San Francisco could get worse and spread to other regions of the U.S. if the recession is prolonged.

“There’s a question about when a trough in rents is coming,” said John Pawlowski, an analyst at Green Street.

Moreover, investors are keeping a close eye on eviction moratoriums. A federal moratorium ordered by Congress expired on July 25. But the Trump administration last week—through the Centers for Disease Control and Prevention—imposed a new and more extensive executive order, which could reduce options and cash flow for landlords throughout the country until at least the end of the year.

In an earnings call last month, Paul Beldin, the chief financial officer of Apartment Investment & Management Co., noted that rent collections had been more challenging in areas where local governments had imposed restrictions on evictions for unpaid rent.

“When somebody tells you, ‘You don’t have to pay your rent,’ people tend not to pay,” Mr. Beldin said.

Write to Will Parker at will.parker@wsj.com

Corrections & Amplifications

Mid-America Apartment Communities Inc. reported that its July leasing volume was on track to surpass the same period in 2019. An earlier version of this article incorrectly stated the company’s name as Mid-American Apartment Communities Inc. (Corrected on Sept. 8)

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