Things might not look as good as 2006 and 2007, but they still aren’t bad, according to George Skoufis, S&P’s primary apartment REIT analyst. “In 2008, we expect continued moderation but positive rent growth,” he says. “From a fundamentals standpoint, we’ve seen moderation in rent growth and NOI growth.”
Green Street Advisors, based in Newport Beach, Calif., also studies the REIT market and sees positive growth potential. The firm projected that revenue growth would hit 3.8 percent coming into the year, but those projections have since fallen back to the 3.5 percent mark.
“Apartment REITs overall this year should still achieve positive revenue growth, even in the face of a mild recession,” says Haendel St. Juste, an analyst with Green Street. “Despite a slowing economy and an increased supply of single-family and condo “shadow rentals” in certain markets, the supply/demand picture is still in pretty good balance.”
Skoufis sees the for-sale market troubles as one of the biggest boosts to the supply/demand equation. “Homeownership is coming down,” he says. “That will benefit the multifamily sector.”
Even with a slight recession, St. Juste thinks multifamily will hold up. “Demand will still be driven from household formation, a declining homeownership rate, and Echo Boomer demand,” he says. “Even in periods of very weak job growth, new household formations tend to bottom out at around 500,000 per year, a result of an ever-growing population.”
All of these factors help the REITs, of course. S&P sees AvalonBay (BBB+/Positive), Equity Residential (A-/Stable), and Camden (BBB+/Stable) as setting the pace for the multifamily sector, though it recently downgraded both AvalonBay (for its large development pipeline) and Equity (for not having debt protection).
Although BRE Properties (BBB/Stable), Essex Property Trust (BBB/Stable), Post Properties (BBB/Credit Watch) and UDR (BBB/Stable) were at the bottom of the REITs list, Skoufis says they’re still fairing well compared to other sectors.
“They’re solidly investment grade,” Skoufis adds.
Amplifying this point, the National Association of Real Estate Investment Trusts (NAREIT) reported that Residential REITS were the second best performing REIT sector in the first quarter of 2008.
Apartment REITS, which comprise most of the Residential REITS (the balance is composed of manufactured housing REITs), were up 12.29 percent year-to-date. Residential REIT returns increased 11.20 percent in the first quarter. These are impressive figures compared with the Dow Jones Industrials which was down 7.55 percent to start the year.
Apartment REITs’ total returns compare favorably with the those of the U.S. REIT market, which was nearly flat for the first quarter of 2008. (The FTSE NAREIT All REIT Index was down 0.42 percent, while the FTSE NAREIT Equity REIT Index was up 1.40 percent.)
By contrast, other market benchmarks dove into negative territory to start the year.
Other than the Dow Jones Industrials, the S&P 500 was down by 9.44 percent, the Russell 2000 dropped by 9.90 percent and the NASDAQ Composite was lower by 14.07 percent.
REIT performance accelerated in March, as the FTSE NAREIT All REIT Index was up 3.88 percent in the month.
“The sub prime mortgage crises did not have a direct negative impact on apartments but did in fact have an indirect positive impact,” says Brad Case, VP of research and industry information at NAREIT. “All those people who could not afford to buy homes had to start renting apartments.”
This, Case believes is the reason Apartment REITS are a safe way to play the real estate meltdown.
“Fundamentals in the REIT industry are pretty strong and there is no real sign that they are likely to weaken anytime soon,” Case concludes.
For more, see “Even Ben Stein Likes REITs”.
Click here for an updated list of Apartment REITs, including current yields
Click here for an updated list of REIT dividends being paid in stock, including current “yields”