Don’t Count Big Cities Out Yet – Apartment Rents On the Rise
September 14, 2021
2 min read

At the height of the COVID19 Pandemic in mid-2020, the migration of families from large cities to suburbs was so great that many wondered if we were experiencing the decline of the big city. While obviously no one expected big cities to empty out, the looming question for investors was how this significant migration to the suburbs might negatively affect future real estate values.

As we head into the back half of 2021, the fear that residential real estate in big cities is in decline has not come to pass. In fact, the opposite appears to be taking place. Residential real estate and apartment rentals in many markets are now stronger than ever, even surpassing pre-pandemic levels. As recently reported in the Wall Street Journal, “Apartment rents are rising fast, boosted by young professionals returning to cities and an expensive housing market that keeps many of them renting. Median rent has risen more than 10% over the past year, according to home search website Apartment List. That figure is also 9.4% above where rents stood in March 2020, right before Covid-19 lockdowns began.”

The COVID19 Pandemic created significant changes in residential real estate consumer behavior. Remote working arrangements freed many families from the need to live near the office in large cities. In addition, lockdowns created a desire for greater access to outdoor amenities that tend to be more plentiful in suburban locations. Both situations drove homeowners to seek homes with larger square footage and additional rooms for office and school. 

Given these consumer changes, many experts believed that large city homes and apartments without these amenities would decrease in demand, and real estate values in large cities would suffer. Some of the early evidence seemed to back this projection up. As stated in the article, “Job losses at the beginning of the pandemic initially hurt rent collection. Occupancy rates dropped to new lows for some landlords. Major markets like New York and San Francisco had double-digit declines in asking rent, sending apartment stock prices tumbling.” 

However, a larger force was also at work. Young workers and millennials were moving in greater numbers into the residential real estate market at a time in which that market was experiencing an historical supply shortage of new and used residential homes. This historical shortage has allowed the residential market, including rentals, from experiencing a meaningful valuation decline. As discussed in the article, “One big factor behind the recent increase: Soaring housing prices are forcing many would-be home buyers out of the for-sale market, and they have had little choice but to pay up for rent. As of June, median existing-home sales prices are up 23.4% from a year earlier to $363,300—a record high, according to the National Association of Realtors.” As we head into fall, it is impossible to predict how the COVID19 Delta Variant will affect the smooth functioning of the economy. However, even as cases continue to grow in almost every region, many businesses are opting to bring workers back to the office. As workers return to the office, large cities are experiencing a snapback in real estate activity. From the article, “in nearly every major metro area, rents are now much higher than they were a year ago. New York and San Francisco rents have begun to recover without having to lure tenants with free rent or other incentives so often anymore.”

Steve Sapourn
Steve Sapourn

Steve Sapourn is an active real estate investor, Aloha Capital’s co-founder, and portfolio manager. At Aloha, Steve has overseen more than 1300 real estate investor loans in 35 states. He has managed alternative investments in a variety of asset classes for over 25 years. He has deep experience in designing low-risk portfolios that reliably outperform benchmarks. Over his career, Steve has served as portfolio manager for a Fund of Funds, where he analyzed hundreds of alternative investment strategies. In addition, he has developed and implemented quantitative trading strategies in the futures, stock, and volatility markets. Steve’s long and diverse career benefits Aloha’s investors.