Apartment REITs Grow Stronger Auction.com on Twitter · Apartment REITs Grow Stronger ......
Transcript of Apartment REITs Grow Stronger Auction.com on Twitter · Apartment REITs Grow Stronger ......
Feb 17, 2015
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Apartment REITs Grow StrongerBendix Anderson
More renters meant more profits for multifamily REITs in 2014, which providedtremendous returns to their investors over the last year.
“This is clearly a solid time for the whole multifamily REIT sector,” says Calvin Schnure,an economist and senior vice president of research and economic analysis for theNational Association of Real Estate Investment Trusts (NAREIT).
The outlook for REITs is also good, with demand expected to stay strong for theforeseeable future, according to NAREIT, improving demand from investors.
REITs had a great start to the new year
Apartment REITs delivered a 6.96 percent return to investors in January, including a
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2.88 percent return from dividends, according to NAREIT. That’s a very high return forjust one month—for many real estate investments, about 7 percent would be anacceptable return for an entire year. In comparison, the S&P 500 fell 3.0 percent inJanuary.
Investors in apartment REITs may be getting used to very strong returns after receiving a39.62 percent total return in 2014, including a dividend yield of 2.88 percent. That’scompared to a 14.22 percent for the S&P 500. Apartment REITs also did better than allequity REITs overall in 2014, which earned a total return of just 28.03 percent.
Strong stock prices reflect strongperformance from the REITs. “We’veseen good, solid growth in earnings,” saysSchnure.
Demand is high for apartments, andSchnure expects REITs to benefit fromdemand for apartments that is stronger
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than supply of apartments for theforeseeable future. The number of rentalhouseholds surged by a record 2 millionunits over the past four quarters as theacceleration in job growth begins tounlock pentup demand for rentalhousing. “This is the biggest increase inrental occupancy rates since the CensusBureau began tracking data in 1965,”says Schnure.
Schnure estimates there are 3 million or more “shadow households” in the form of peopledoubledup with roommates or family members. These individuals are likely to search fortheir own apartment as they get first jobs, better jobs or raises. REITs are in a strongposition to capture these new renters. “They tend to own investment properties in gatewaycities— that’s where the demand is,” says Schnure.
Developers are building new units, but not enough to hurt REITs. “I am not at all worriedabout new supply,” says Schnure. “This growth in rental demand is likely to outpace thenew supply of apartments in the pipeline, supporting the outlook for multifamily housingstocks.” Developers are now building new apartments at a rate of 300,000 to 350,000 ayear. “That is not keeping up with demand,” Schnure notes.
Affordability is the biggest thing holding back apartment REITs—and the broaderapartment market. “The number of renters paying 30 percent or more of their income onrent is high,” says Schnure. “That is putting a cap on rent growth, which puts a cap onearnings growth for apartment REITs.”
Nationwide, rents continued to grow in the fourth quarter, but at a slower pace than inprior years. “With the job market picking up, normally rent growth would be severalpercentage points high than it is right now,” says Schnure.
REITs turn to secondary markets
REITs continue to deploy their available capital to buy up properties and grow their
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portfolios, experts say. However, as economic recovery spreads, REITs have become moreinterested in secondary markets.
“There seems to have been a shift back into secondary markets after being very focused onmajor markets during 2013,” says Ben Carlos Thypin, director of market analysis for RealCapital Analytics. REITs made 35.91 percent of their purchases in secondary markets in2014, up from 24.05 percent in 2013. With the exception of 2012, that’s the biggestconcentration on secondary markets that the REITs have shown since 2009. Before thecrash, REITs regularly made well over a third of their purchases in secondary markets.
“It makes sense,” says Schnure. “Capitalization rates are low in secondary markets. Wehave also seen recovery spreading to secondary markets in 2014 from gateway cities.”
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