Demand for apartments is recovering this year. It was already strong across much of the red-hot Sun Belt region as more people and businesses migrated to that area of the country during the pandemic. However, it's now rebounding sharply in major gateway cities initially hit hard by COVID-19.
That's benefiting real estate investment trusts (REITs) focused on multifamily properties in those locations. Here's a closer look at some of the eye-popping numbers they posted in the second quarter.
Demand is through the roof as cities reopen
Leading residential REIT Equity Residential (NYSE: EQR), which currently focuses on major coastal gateway markets, commented on the strong market conditions it experienced during the second quarter.
CEO Mark J. Parrell stated in the earnings release: "Driven by an accelerating economy and the reopening of cities, our operations continue to recover rapidly with robust demand for our apartments in all our markets leading to high occupancy, increased pricing power, and an almost complete absence of new lease concessions. This has driven pricing and physical occupancy up so quickly that they now equal or exceed 2019 levels in most of our markets." Overall, Equity Residential noted that pricing has improved 29% since December and is now above the peak of July 2019.
AvalonBay Communities (NYSE: AVB), which also focuses on major coastal gateway cities, saw a significant improvement in rental rates during the period. The REIT noted that move-in rents are up 18% year to date across its portfolio. That puts them right around their peak levels from 2019.
Several regions have already exceeded their pre-pandemic peak, including New England, metro New York/New Jersey, the Pacific Northwest, and Southern California. While suburban communities are performing better than urban ones (up more than 3% from peak levels versus down 7.5%), the company expects urban rents to accelerate as the reopening continues.
Fellow residential REITs Essex Property Trust (NYSE: ESS) and UDR (NYSE: UDR) also saw improving trends in the second quarter. Essex, which focuses on the West Coast, noted that: "We experienced strong economic growth in the second quarter, as COVID-19 restrictions were gradually lifted. The momentum in rent growth continued in July, and we have now achieved net effective market rents for the Essex portfolio that are slightly ahead of pre-pandemic levels."
Meanwhile, UDR, which has exposure to both coastal gateway and Sun Belt markets, stated that it continues "to see sequential improvement in traffic, occupancy, rate growth, and collections in all of our markets."
Why rental rates will likely continue climbing
As strong as the second quarter was for these REITs, it's only the beginning. Rents will likely keep rising because of higher occupancy levels, giving these REITs significant pricing power since the supply of new apartments remains steady.
For example, UDR noted that "we achieved an all-time high portfolio occupancy of 97.5% in June." Because of that and "accelerating operating trends across our portfolio, driven by the pace of the economic recovery," the REIT sees a "strong second half of the year." As a result, UDR raised its full-year 2021 guidance for the third time.
AvalonBay, Equity Residential, and Essex Properties are also seeing improving occupancy levels. Essex Property's occupancy has increased from 94.9% in the middle of 2020 to 96.6% at the end of this June. Meanwhile, Equity Residential's occupancy has improved from 94.9% at the end of 2020's second quarter to 96.1% at the end of June 2020. With high occupancy levels, these REITs have the power to raise rents amid improving demand. Because of that, they also raised their full-year earnings forecasts.
Pricing power points to a strong year for multifamily REITs
Last year proved challenging for apartment owners focused on major cities along the coasts because many renters who could work remotely moved to cheaper areas. However, with most cities reopening, renters are flocking back to the major metro areas. That's causing vacancy rates to fall, which is driving up rental rates. Those factors have apartment REITs on track to deliver even stronger second-half results.