US apartment returns down in Q2 2020, but better than initially anticipated


Grosvenor Americas’ Research Director, Brian Biggs, examines the pandemic’s impact on rental performance and investor confidence

The second quarter of 2020 will go down in history as the first full quarter when the impact of COVID-19 became visible in US economic and real estate data.  Despite the extraordinarily bad economic performance, US apartment fundamentals held firmer than many had anticipated at the beginning of the quarter.  According to data on just over 11 million apartment units from the National Multifamily Housing Council, 95.2% of tenants made rental payments in the quarter.  This figure is down marginally from the 96.8% payment rate in Q2 2019, but remarkably high considering the economic backdrop.

Despite robust rental collections, these may not offset the impact of deteriorating capital markets sentiment on apartment total returns. National NPI total returns contracted by 0.63% quarter-over-quarter, US national income returns rose 1.01%, while US national capital returns fell 1.64% over the quarter.

Apartment cap rates fell by 10 basis points in Q2, ending at 4.1% on a value-weighted basis. Appreciation returns were negative when cap rates fell, suggesting that net operating income was weaker than expected. The market had little price discovery with few transactions in the quarter, so investors will have to wait to see what impact the pandemic will have on apartment cap rates.

Investor risk aversion and aggressively expansionary monetary policy pushed the US 10-year treasury yield to a post-WWII low of 0.7%. Thus, the apartment cap rate spread over treasuries stood at 340 basis points, 150 basis points higher than the same quarter in the previous year and the widest spread since 2012. The widening spread between apartment cap rates and treasuries suggests that investors see elevated risks in apartment investing.

If you would like to learn more, please contact Brian Biggs.

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