Those headwinds put significant downward pressure on the company's financial results during the third quarter. NOI slumped 8.4% year over year, causing normalized FFO per share to tumble 15.4%. One of the drivers was a decline in physical occupancy. While the portfolio-wide number went from 96.5% to 94.8%, the decline was steeper in urban core areas (92.5% in June of 2020 to 88.9% by October).
Tough days still ahead
Parrell wasn't overly optimistic about the near term. He noted that "while we have seen recent improvements in renewals and application volume, pricing pressures continue and headwinds remain." Because of that, "we anticipate that our financial results will weaken over subsequent quarters as the full effect of the pandemic is felt on our business." That continued weakness will likely keep the pressure on Equity Residential's stock price, which has already fallen by more than a quarter this year.
While the next few quarters will likely remain tough for apartment owners focused on urban core areas, the longer-term picture isn't quite as dim in Parrell's view. He stated: "Looking longer term, we expect that positive developments relating to the pandemic will eventually re-energize the urban centers which have persevered and thrived through many decades and in similarly challenging circumstances. We continue to see the urban locations in our markets as centers of our country's knowledge industries and expect them to again attract disproportionate numbers of affluent renters once the pandemic ends."
While he's optimistic urban areas will bounce back, there's no way of knowing when that recovery might begin to unfold, since there isn't an approved vaccine yet (but one shows promise). Meanwhile, assuming a vaccine does eventually receive approval, it will likely take several months to vaccinate everyone. That's the key to giving companies the confidence to return all their employees to the office and drive renters to move back into urban core areas to shorten their commute. Some experts think it might not be until the end of 2021 or even 2022 before we're able to return to some sense of normalcy.
It might get worse before it gets better
Occupancy levels and rental rates are under pressure in urban core areas because renters are taking advantage of their ability to work remotely by moving to lower-cost suburban regions. That trend isn't likely to reverse anytime soon, since we seem to be several quarters away from returning to a new normal. Because of that, shares of apartment REITs like Equity Residential with more exposure to urban core areas of high-cost cities could be under pressure for a while. However, as those areas recover, these REITs should eventually bounce back.