When the coronavirus pandemic spread around the world in early 2020, one of the hardest-hit sectors was apartment real estate investment trusts (REITs). There's a good reason for that, but now that the apartment sector has turned hot again, there's also a good reason to be excited about the future. Here's a look at how Equity Residential's (EQR 2.41%) portfolio is faring today and what it suggests about the future.
A hard time
Equity Residential owns 310 communities with nearly 80,500 units in 12 key U.S. markets. It has material exposure to large cities and coastal markets, which were exactly the areas that people fled from during the early days of the pandemic. To sum it up as simply as possible, occupancy fell across the board, lease renewals dropped materially, and rent rates declined as the REIT looked to keep its apartments occupied.
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Although the pandemic led to an abrupt shift in the business, the actual outcomes aren't shocking at all. One of the key factors to consider is that apartments have lease terms that are, generally, one year long. That means that business downturns tend to hit quickly. The pandemic created more uncertainty than usual, but the drop in occupancy, reduced renewals, and falling rent rates are pretty much what you would expect during any apartment industry downturn.
Bouncing back strong
That short lease term, however, has a silver lining when things start to improve. Indeed, the apartment sector can recover just as quickly as it declines. And Equity Residential's recent portfolio statistics prove this out.
On the occupancy front, the company hit a low point in the third and fourth quarters of 2020 in the 94% space. Since that point, occupancy has been trending higher, rebounding to 96.4% in early 2022. While a couple of percentage points may not seem like a huge deal, every empty apartment is a dead weight on the portfolio because it means less revenue over which to spread costs. And the costs don't really go down just because a property has a few extra open units to rent out. So a couple of percentage points is important.
In addition to rising occupancy levels, Equity Residential has seen improving demand from its current tenants. For example, renewal rates have gone from 57.4% in late 2021 to 61% in early 2022. This is notable because the REIT doesn't have to do any material work for a renewal, unlike what's needed to fill an empty apartment. So this slight change helps to reduce operating costs while also supporting occupancy.
And rent rates have been strengthening as well. New renters are paying 13.4% more than existing rents in early 2022. That's even better than the 10.6% increases seen in the fourth quarter. Renewal rates for tenants who stick around are also up, rising 12.3% in early 2022 from 5.7% in the third quarter of 2021. All of these rate increases show just how strong demand is for Equity Residential's assets. Yes, inflation is a part of the puzzle, but the REIT can pass on rising costs, which is a huge positive.
Strong fundamentals
Essentially, Equity Residential appears to be firing on all cylinders today. And as long as the current demand for apartments in major metropolitan areas keeps up, there's no reason to expect a major shift in the trend. Investors are clearly aware of the changed business dynamics, bidding the stock up to a point where the dividend yield is a thin 2.8%, toward the low end of its historical range. At the same time, current shareholders should be very pleased with the success the REIT is experiencing today.
