The coronavirus pandemic had a noticeable impact on demand for apartments. Due to the increase in remote work, many renters opted to move to lower-cost suburban areas to save money. That impacted apartment real estate investment trusts (REITs) like AvalonBay Communities (NYSE: AVB) and Equity Residential (NYSE: EQR) that have lots of exposure to the urban core areas of high-cost coastal gateway cities such as New York, Boston, and San Francisco. Both companies experienced declines in occupancy levels, which weighed on rental rates.
However, with vaccines rolling out across the country, workers could return to their urban offices in the coming months. That's leading an increasing number of renters to start moving closer to cities, evident in the recent leasing trends reported by these leading apartment REITs.
AvalonBay reported earlier this month that average physical occupancy across its established communities was 95% in February. That's an improvement from 94.7% in January, 94.3% in December, and 93.4% in October.
Further, it noted occupancy levels in urban communities have recovered from 90.3% in October to 93.7% in February. Those improvements appear poised to continue. The company's CEO stated at an industry conference earlier this month that AvalonBay has been seeing accelerating demand for its apartments in coastal markets.
Rival Equity Residential reported similar changes in its occupancy levels. The REIT's physical occupancy was 95.3% in February, an improvement from 95.1% in January and 94.4% in December. The company noted it continued to see demand for its apartment units in February 2021 as evidenced by a continued trend of move-ins exceeding move-outs, translating into higher physical occupancy.
Early signs of improvement
The increase in demand for urban apartments is also starting to benefit rental rates. Rents had been under pressure in recent months as REITs offered lease concessions to incentivize existing tenants to renew and entice prospective ones to move into their buildings. However, that trend is starting to reverse.
Equity Residential reported that leases signed in February were at an average of $2,413 a month. While that's an 11.5% lower blended rate than prior leases, it's up from an average of $2,287 a month for leases signed in December, which was 13.9% below the previous blended rate, thanks to improving rental rates and a reduction in lease concessions.
AvalonBay is also seeing some positive trends in like-term effective rent changes. Overall, that metric has improved from a decline of 11.3% in October to a decline of 7.9% in February. Both suburban and urban communities are seeing positive trends, with the like-term effective rent change narrowing in urban communities from a 20% decline to 16.6% below prior rates.
About to get a booster shot
Equity Residential is "optimistic that 2021 will be a year of recovery" as more renters migrate to urban areas in the coming months, said Mark J. Parrell, Equity Residential’s president and CEO, in a press release. This should drive even higher occupancy levels and rental rates. Parrell added that "our affluent, well-employed resident base remains drawn to our nation's great cities, and we expect demand to accelerate and pricing to continue to improve as vaccines are widely administered and cities become more active."
Because of that, shares of urban-focused apartments REITs could continue rallying in the coming months as this trend plays out. While shares of Equity Residential and AvalonBay have rebounded from their pandemic lows, they're down around 10% since the start of 2020. That suggests REIT investors could see more upside ahead as these REITs get a shot in the arm from vaccines, which will enable a return to normalcy in cities over the coming months.