Does The ‘Exodus’ From Cities Scream Investment Opportunity?

Key Takeaways:

• Data on declining big city populations and rising rents in these places aren’t necessarily in sync.  
• Considerable wealth still exists in places such as New York, San Francisco, and Los Angeles.
• Despite a bad broad environment for REITs, luxury apartment REITs might still have a place in your portfolio.

Every time you turn around, there’s somebody pronouncing cities dead on arrival. 

Like James Altucher’s now infamous gun-jumping blog turned NY Post bombast: 

Source: NY Post 

Hard Census data backs up many of these assertions:

• In 2021, the New York, Los Angeles, and San Francisco metropolitan areas lost more than 700,000 residents combined. 
• LA County shed the most population, losing more than 159,000 people in 2021. 

The day this news broke, several luxury apartment REITs were bludgeoned.

And yet…Rents Are Skyrocketing Again In Cities! 

Consider the following numbers from Zumper, showing astronomical year-over-year rent increases in America’s biggest cities. 

Source: Zumper March 2022 National Rent Report

It seems like every time you scroll your newsfeed you see stories about lofty rents soaring and discouraged first-time homebuyers outbid and priced out of the aforementioned pricey markets. 

Making Sense of Contradictory Data

Census data lags. 

It doesn’t jibe with current reality on the ground in big cities. 

Nor does a decline in big city populations does not foreshadow the death of these places. 

First, there’s the reality that people died during the pandemic. 

In 2021, these deaths coalesced with fewer births and an aging population to produce a natural population decrease across the board, according to the Census report. 

Second, while remote work has prompted a considerable number of people to leave dense urban cores, the rising rents and bidding wars are real. So it’s not like the desire to be in the center of it all evaporated. 

Third, those would-be homeowners priced out of posh markets are still affluent enough to rent. And to do so at a premium in luxury units. 

Possible Plays

Which brings us to an apartment REIT worth looking at – Essex Property Trust (ESS). 

When negative news on cities hits, ESS – and peers Equity Residential (EQR) and Avalon Bay (AVB) – tend to, at the very least, dip, trade in a depressed range for a day or two, only to rebound. 

For long-term investors, here’s a classic case of adding to a position you believe in by buying these dips.

With its high-end luxury apartment properties concentrated in San Francisco, Southern California, and Seattle, ESS might be an apartment REIT to consider on temporary declines, especially if you have a long-term time horizon. 

It’s expensive to buy in Essex’s markets. 

According to the company, it actually costs less to rent in Northern and Southern California and Seattle:

Source: Essex Property Trust March 2022 Investor Presentation 

As long as a meaningful number of high-end renters, including the ones who can’t quite yet become homeowners, exist in these places, REITs such as Essex should remain relatively well-positioned. 

The company also looks good from a debt standpoint. 

As noted on its most recent earnings conference call, Essex refinanced almost 40% of its debt over the past two years, locking in low rates. Just 6% of its debt matures in the next two years and only 4% is exposed to variable interest rates. 

The Bottom Line: Lagging data screams an exodus from cities. Even if this population decline holds or intensifies, it doesn’t take into account the wealth that remains in our urban centers. Some of this wealth will always go towards expensive rents. 

In addition to ESS, AVB and EQR might be worth a look. Both apartment REITs have broader national exposure than ESS, but still maintain large presences in the country’s largest metros.

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