The COVID-19 crisis has certainly caused investors to rethink their positions in office and urban apartment real estate investment trusts, or REITs.

The success of remote working has caused investors to question the demand for expensive urban office space. Many renters who were cooped up in tiny urban apartments have decided to head to the suburbs, which is raising concerns over tenant demand, especially if employers begin moving en masse to the suburbs. The other concern has been that increased unemployment will cause borrowers to struggle to make rent.

Are these concerns overblown? Has rental performance really suffered as much as the market seems to think it has? 

Luxury apartment buildings at dusk

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Despite elevated unemployment, apartment dwellers are paying rent

The National Multifamily Housing Council just put out an interesting statistic. Through the first six days of October, 79.4% of people in its survey of 11.4 million units paid October rent. This was up from the 76.4% who made a September rent payment by Sept. 6.

The fact that payments increased compared with last month is not surprising, as the economy is slowly improving. The surprising fact is that this percentage is unchanged from October 2019.

Given that some of the big apartment REITs like Equity Residential (NYSE:EQR) and AvalonBay Communities (NYSE:AVB) are down 30%-40% over the past year, are these price declines justified?

Urban apartment REIT tenants less affected economically by COVID-19

AvalonBay is a multifamily apartment REIT that owns and operates 276 apartment communities with over 80,000 units in 11 states and the District of Columbia. The company's properties are primarily located on the East Coast and West Coast, concentrating on cities with high wage growth and high costs of living.

Equity Residential owns and operates 304 properties with over 78,000 units in urban areas with similar characteristics to the type AvalonBay targets. These types of tenants are the most likely to be able to work remotely, which means they have been less disrupted economically by the pandemic.

AvalonBay is scheduled to report earnings on Oct. 28, and Equity Residential announced it will report on Oct. 27.

Is there potential for a pleasant surprise in Q3 earnings reports?

AvalonBay updated investors with rent collections as of Aug. 31, and the company has collected 96% of billed rent. So tenants are generally paying rent. If you look at the internals of the report, you will see that AvalonBay appears to be "buying tenants" by reducing rent. This has been one of the worries about the sector. But according to recent research by the National Association of Home Builders, it looks like this trend has been moderating. In September, the NAHB's real rent index declined 0.1%, after declining 0.4% in July and 0.3% in August. Given that AvalonBay hasn't updated for September, investors could see a pleasant surprise when the company reports.

The apartment REITs have underperformed single-family housing REITs like Invitation Homes and American Homes 4 Rent massively since the COVID-19 crisis began, and they should report similar tenant performance numbers.

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The market has given the cold shoulder to the urban office REITs as well. That said, the big REITs like Kilroy Realty and SL Green Realty reported strong occupancy numbers and tenant performance.

The big surprise of 2020 so far has been that people are paying their bills. While it is still too early to say for sure, if the apartment REITs report similar tenant performance numbers to the NMHC numbers, the stocks could become a lot more interesting. While it is a common investment theme to write the epitaph of cities, that view could be premature.