Insight #2: Strengthen Your Core in Ailing Coastal and Downtown Assets

By: Jay Parsons, Andrew Bowen and David Polewchak Some prognosticators are beginning to push out rosy outlooks for America’s hardest-hit real estate markets: high-density urban areas, primarily in Coastal gateway cities. We’d love to say we agree, but … at this point, unfortunately the optimism seems premature. Apartments in gateway cities and in most downtown submarkets nationally will likely experience continued pains in 2021. Housing in high-cost, high-density areas banks on equally high-density employment – particularly office jobs. It takes some logic gymnastics to bet on a return to normal offices anytime in 2021. Many employers are offering extended (or even permanent) work-from-anywhere programs. Some have relocated to the Sun Belt. Vaccines help, yes, but rollout will take time – even as new variants of the virus emerge. At the same time, new lease-up competition will remain substantial for at least another year in most high-density submarkets across the country. How should property managers and asset managers react to prolonged challenges? It won’t be easy, particularly with most confronting lofty pro formas. But leading apartment operators have a playbook dedicated to assets in these settings. Watch the video on this topic. A Challenging Backdrop COVID-19 neutralized many of the advantages of high-density living (walkability, short commute, lifestyle) while also elevating policy risk (eviction bans, rent controls, lockdowns) as an underweighted negative in the “core” investment thesis. By year-end 2020, the performance splits were severe. By market: Rent growth for new leases had returned across major Sun Belt markets (+0.2% year-over-year) but remained dramatically in Coastal metros (-9.9%). By submarket: Rent growth for new leases increased 0.9% in suburbs nationally compared to a decline of 7.4% in urban core submarkets across the country. Big splits (between Coastal to Sun Belt and urban t...