REIT Market Dynamics in a State of Flux

REIT Market Dynamics in a State of Flux

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Rents and taxes were through the roof. The neighborhood dynamics were far from ideal. For San Francisco residents, you may have either faced a lengthy commute or been forced to live in the heart of the city where crime is an issue.

Yet a vast majority found these trade-offs were worth it in the long run. Being front-and-center at one of the most technologically and professionally vibrant scenes in the world was the focus. Metro San Francisco offered its employees a wide range of intriguing vocations and a shot at making it big.

But all that changed with the onset of COVID-19. Telework options meant that it was no longer essential to be close to the offices downtown. Workers now had the option to live in the suburbs where they had more room, and the cost of living was significantly lower. And while there has been a noticeable exodus from the more urban neighborhoods in the Bay Area, the major tech and industry moguls that made the city initially appealing to live in aren’t planning on relocating.

Apple, Google, Twitter, and numerous other corporations still own scores of offices in San Francisco. Investors in real estate investment trusts (REITs) that are concentrated on rental properties in large cities such as New York and San Francisco are hoping that the telework boom is short lived, and employees return to the physical workplace soon.

The global pandemic has thrown the rental-apartment sector into disarray. Prior to the outbreak of the virus, the average rent in several major cities were outpacing suburban counterparts as the metro areas were the destination of choice for youthful employees seeking to take advantage of the public amenities and brief commutes the downtown areas had to offer.

In the post-COVID world, rents have taken an epic nosedive in the Bay Area as white-collar workers have moved to the suburbs—where median rent prices have risen significantly in recent months. On the other hand, shares of large REITs such as Equity Residential and UDR Inc., have collectively fallen 44% since 2020. Rental corporations that cater primarily to middle-class tenants in communities away from the coast have weathered the economic turbulence more easily than others. For example, Mid-America Apartment Communities—which is based primarily on Sunbelt and suburban developments—only experienced a 3% market hit in 2020.

Unfortunately, this trend is expected to continue into the foreseeable future barring a dramatic change in the pandemic status. Public health insiders anticipate that many office workers will not return to physical offices until this summer, if at all. And even when they do return, mitigation protocols will mean that they will only be in a few times a week—still making it less essential to live nearby.

REIT owners have been prompted by these market conditions to consider shifting their holdings to markets more suited for this new way of life. In the private market sector, several of the biggest multifamily property sales in 2020 were in suburban areas as real estate investors are looking to spaces outside the traditional urban environment to expand.

In San Francisco especially, most landlords have opted to relax rents to maintain occupancy rates at the current level of approximately 90%. However, while occupancy has remained relatively stable, the average rent prices has consistently dropped over the last quarter. To incentivize tenants to remain in downtown rentals, certain REIT entities have doled out rent relief discounts—the majority of which have been concentrated in New York, the Bay Area, and Boston. Still, a resurgence in the demand for housing options will eventually be needed to boost the performance of these urban REIT platforms. Historically, this has been a result of relocating younger millennials that move to cities for work opportunities—a trend that is of right now an impossibility due to health concerns. Whether such a market dynamic will return in the future and when is yet to be determined and will greatly impact the performance of REITs in the Bay Area and across the country.

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Copyright 2022 GERACI LLP
All Rights Reserved
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