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Comparing Suburban-Heavy and Urban-Heavy REIT Portfolios

Have REITs Avoided the Urban-Core Slump?

By Sarah Simmons | Wednesday, March 8, 2017

Urban was the word at the start of this apartment cycle. Developers rushed to build in urban-core submarkets and tap into demand for the live/work/play lifestyle popular with millennials and baby boomers, the largest renter age groups.

Publicly traded apartment REITs weren’t immune to the lure of this trend, though some invested in it more heavily than others. Once committed to a strategy, REITs generally don’t change course often, which means following through for better or for worse.

At the moment, heavy concentration in urban-core submarkets is falling on the “worse” side of the scenario. Effective rent growth in most urban submarkets is softening as new supply in those areas is reaching critical mass. 

The following charts tell the story of the rent growth divide in several large metros. The areas that continue to show healthy growth are most often located in the suburbs, while those that are struggling to keep pace or falling flat are in the urban core.

Portland, OR and Austin, both among the nation’s top markets in recent years, show the strongest evidence of this pattern. The Austin market’s average effective rent growth for 2010-2016 was 4.7%, while Austin’s urban-core Central submarket showed average rent growth of 2.9%. Portland’s Northwest submarket also underperformed the market from 2010-2016, with only 4.0% average rent growth, compared to the overall market’s 6.3%.

Both Austin’s Central and Portland’s Northwest submarket reached their rent-growth peak for this cycle in 2011, and neither has approached that peak since. In this way, both typify the overall trend of urban cores that were quick to heat up but have decidedly cooled down.

It would stand to reason, then, that REITs that chose to develop and purchase a larger share of properties in urban-core areas would be seeing this same type of slowing. Meanwhile REITs with more suburban assets should be weathering the recent national moderation a bit more comfortably.

Axiometrics data shows that the REITs with the largest share of urban-core properties are UDR and Monogram Residential Trust (MORE), while those with the most non-urban core or suburban properties are Essex Property Trust (ESS) and Milestone Apartments (MST.UN). Milestone actually has no properties in its portfolio that Axiometrics classifies as urban core. The mix of AvalonBay’s portfolio makes sense in light of comments from AVB cited in a 2015 “Real Estate Weekly” article that the company would be shifting its strategy toward suburban development.

A deeper look at the data for the most urban-heavy REITs and the most suburban-heavy REITs using Axiometrics’ Portfolio Comparison tool helps draw out differences in performance between the two groups. A quick look at the scorecard included in each portfolio comparison gives an overview of how the two groups of properties compare in terms annual effective rent growth, occupancy rate, rental revenue growth and job growth. National figures for each metric are also included.

The February 2017 figures for the average annual effective rent growth of the two groups show the REITs with the most urban-core properties unexpectedly ahead at 0.6% rent growth, and REITs with the most suburban properties in the negative at -0.2%.  Both are also underperforming the national average of 2.3% by a wide margin.

The occupancy figures are a different story, with both the more urban-heavy REITs and the more suburban-heavy REITS at 96.3% occupancy, well above the national average of 94.4%.

The Portfolio Comparison tool also includes charts for each of the data points included in the scorecard, making it easy to compare the long-term performance of both groups of properties. The chart for rent growth shows the REITs with the least urban-core properties pulling ahead in early 2013, and consistently leading until recently.

The REITs with the most urban-core properties were still showing gains over the REITs with the least urban-core properties in spring 2012, before taking a sharp downward turn later that year. The ability to zoom in on the charts makes it easier to spot these differences, and the data sets behind the charts can be examined or manipulated further by clicking on the disk icon to download them into Excel.

Though the REITs with more suburban properties may have had the advantage in terms of rent growth since 2012, occupancy numbers for both groups have been a much closer call.  The urban-core heavy REITs have been ahead most often, with seasonal spikes in the summer months of 2013, 2014 and 2015. The gap between the two groups was much narrower throughout 2016, but both have been consistently above 96% occupied on average.

Though the overall assumption may be that urban-core areas are not performing as well as suburban submarkets, individual markets can vary quite a bit and some could be reflecting different results. The Portfolio Comparison tool includes a table that lists the markets where properties in each portfolio are located. Where both portfolios have properties in a market, the table gives a side-by-side view of how the properties in each MSA are performing for metrics like effective rent growth and occupancy, allowing for a market-by-market evaluation.

Though rent growth may be softening in urban-core submarkets, the performance of urban-heavy REITs as compared with suburban-heavy REITs shows that the gap has been closing as the national apartment market moderates. And urban-heavy REITs are still strong in terms of occupancy. Axiometrics’ Portfolio Comparison tool can reveal the subtle differences between groups of properties and shed new light on old assumptions.

Sarah Simmons

Sarah Simmons

Senior Content Writer and Editor

Sarah Simmons, Axiometrics Senior Content Writer and Editor, has a master's degree in English and is an accomplished journalist and blogger.

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