The pandemic has produced some strong real estate winners and losers. Winners
include suburban housing. Another winner is industrials. (See the accompanying
article, "Industrial Revival.") A third - and perhaps the biggest, bucking
analysts' early predictions - has been apartments.
At the start of the pandemic, analysts were forecasting a decline for apartments.
CoStar, a major commercial real estate data tracker, assembled a team that
answered the question that was on everyone's mind: what is this virus going to
do to my apartment investment? The picture for apartments looked grim. Apartment
dwellers were losing their jobs and would soon be unable to pay their rent.
Government would seek to protect people from eviction and would institute
eviction bans. Without eviction, landlords would be powerless in the face of
tenants stopping their rent payments. And everyone would want to be leaving those
apartments. Apartments are tight quarters, with tenants tight up against one
another. Tight quarters were a great way to catch the virus. An exodus for
anyone with a way to exit seemed to be on the horizon. The CoStar team read these
tea leaves and foresaw a pending price decline of 25% for apartments nationwide.
(See CoStar's prediction of a 120 basis point increase in capitalization rates
for apartments, equal to a 25% capitalization rate increase and a resulting 25%
What happened was the opposite.
Zaxia tracks the median price trend for three family houses in the communities
where small apartments concentrate in Greater Boston and its suburbs. Zaxia
measured a 37% increase in the median price of three-family houses in Greater
Boston from the start of the pandemic to mid 2021. The trend follows a more
stable trend in the period preceding the pandemic. The price rise was not the
result of a rise in rents. It was the result of investors accepting a lower
initial rate of return on their apartment investments. Capitalization rates are
a measure of the rate of return. They move inversely to prices. That is, when
prices rise, capitalization rates fall. Prices for small apartments have
stabilized in the past two quarters, according to Zaxia data. Investors are
taking a break from the strong price run-up.
The same trend is evident in the large apartment sector. PriceWaterhouseCoopers
tracks the trend of capitalization rates for large-scale institutional investments
nationwide. At a time when it appeared that apartment capitalization rates could
decline no further in early 2020, they proceeded to decline by 80 basis points,
according to PwC's most recent data. A decline of 80 basis points is a decline
of 15% from PwC's median apartment capitalization rate, reflecting a price
increase at the same 15% rate.
A couple of lessons are available to all of us from this. One is that trends are
not always as predictable as they may seem on day one. Another is that, in spite
of whatever else may be going on, as investments, apartments are a pretty good bet.