Urban flight, job losses will hurt apartment REITs: Report

REITs heavily invested in older multifamily properties and apartments in gateway cities will see net income decline through 2021, according to Fitch

National Insights /
Oct.October 27, 2020 07:00 AM
Apartment REITs that own Class B and C properties and those in gateway cities will see net income fall through 2021 (iStock)

Apartment REITs that own Class B and C properties and those in gateway cities will see net income fall through 2021 (iStock)

Apartment real estate investment trusts that are heavily invested in older multifamily properties and residential complexes in gateway cities are likely to see net income fall through next year.

According to a new Fitch Ratings report, the REITs are becoming increasingly vulnerable to drops in cash flow because of job losses among lower-income tenants and on the opposite end, tenants leaving big cities for markets that offer more space.

Lower-income workers comprise a large share of the tenants at older Class B and C apartment properties. Income loss for these tenants could turn into missed rent payments and reduced cash flow for these apartments’ landlords, according to the report.

The report cites Federal Reserve data that shows low-income workers have borne the brunt of coronavirus-related layoffs. Among workers earning less than $40,000 a year, 39 percent of those working in February reported a job loss by March.

Those job losses, along with the expiration of relief offered through the federal CARES Act at the end of July, have hurt many households’ bottom lines, the report showed. About 14 percent of Americans earning less than $50,000 a year had no confidence they would be able to pay their rent next month, according to the Census Bureau’s most recent Household Pulse Survey, which collected data from Sept. 30 to Oct 12.

The pandemic also has had a disproportionate impact on dense gateway cities.

Higher-earning renters are increasingly leaving those areas for the suburbs or other areas that have more space. Millennials, as they grow older, may also be looking for more affordable and larger apartments in suburban and Sunbelt markets, according to the report.

Those factors will contribute to single-digit declines in net incomes this year and into 2021 for those REITs, according to the report. Fitch expects net income to rebound and increase at a single-digit pace in 2022 and 2023. That prediction is based on previous economic recoveries in the wake of the recessions in 2001 and 2007.


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