Pandemic and Demographic Shift May Slow Apartment Growth
We've reduced our outlook, but attractive values remain.
Given the fallout of the coronavirus on the U.S. economy, we have lowered our short-term and medium-term outlook for the apartment companies we cover. As a result, we have lowered our fair value estimates to $45 per share from $50 for Aimco (AIV), to $194 per share from $214 for AvalonBay (AVB), to $72 per share from $78 for Equity Residential (EQR), and to $273 per share from $307 for Essex Property Trust (ESS). Our no-moat ratings for all are intact. Rent collection has remained relatively healthy between 97% and 98% since the start of the pandemic, only slightly off the normal collection rate, and sequential occupancy declines in the second quarter were only around 1%. However, we expect the economic impact of the pandemic to linger for a few more quarters, which will negatively pressure apartment fundamentals through at least the end of the year.
Even if the economic recession ends relatively soon, we don’t think the recovery in occupancy levels, which allows the companies to drive higher rental rates, will happen immediately. Many urban renters are starting to consider moving out of cities into suburban settings. Millennial office workers may have preferred their proximity to work, but as most companies offer increasing telecommuting options, the switch from urban apartments to suburban homes is becoming more attractive. We believe this will make it difficult for the apartment companies to quickly replace tenants who move out without offering significant rent concessions.
Kevin Brown does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.