On last week's earnings call, apartment landlord Equity Residential mentioned that the two US markets most impacted by a delayed return to office appear to be San Francisco and Seattle. They went on to say that San Francisco is the only market in which they operate where rents have not fully recovered to pre-pandemic levels.

According to Bloomberg (which is relying on employee swipe-card data), office utilization in the San Francisco area is sitting at around 25% as of October 20, 2021. This is compared to a national average of around 37%. The obvious rationale here is that large tech companies have delayed their return to office and/or been more aggressive in adopting remote/hybrid work.

Looking at these numbers, it is clear that as someone who has been going into the office every day since the start of summer, I am currently in the minority.

Earlier this week it was announced that Sam Zell – the billionaire who initially made his money in real estate – is selling over 23,000 apartment units to Starwood Capital Group (Barry Sternlicht) for $5.4 billion. The units are all controlled by Zell’s company, Equity Residential.

This is interesting for a number of reasons, but I’d like to point out two of them today.

Firstly, Zell is famous for selling another one of this companies, Equity Office Properties Trust, to Blackstone for $23 billion in 2007. This was right before the market fell out and so some people are asking whether this signals the end of the apartment run. Average apartment rents in the US have increased roughly 20% over the last five years.

But at the same time (and this is my second point), it might not be that at all. Instead, it could simply be a rebalancing of the portfolio. Here’s an excerpt from the Wall Street Journal:

…Equity Residential has become “less aggressive as buyers of assets” in recent years, Mr. Zell said in an interview late Friday. Instead, it is getting out of suburban markets and into downtown urban centers, where young people are moving and where it is more difficult to build, he said.

Most of the 23,300 apartment units in the deal, roughly a quarter of Equity Residential’s total, are low-rise and mid-rise units in suburban markets in and around southern Florida, Denver, Seattle, Washington, D.C., and Southern California. Analysts expect a significant amount of new supply to be concentrated in those markets in coming years.

Of course, Sternlicht is buying these suburban properties and so he clearly has a different investment thesis. (The purchase price works out to be $230,600 per unit at a cap rate of roughly 5.5%.) But that’s what makes these deals so interesting to scrutinize. Nobody really knows what the future holds.