Despite declining rental growth, multi-family residential stocks continue to beat the S&P Real Estate sector and the S&P 500 overall.
Multi-family REITs such as Essex Property Trust Inc, Camden Property Trust and Equity Residential have appreciated by 23%, 28% and 21% respectively over the last six months compared to the S&P 500’s 10%.
Investors are taking advantage of fundamental changes in the housing market: the shortage of houses on the market, higher mortgage interest rates and loan requirements that have led potential buyers to turn to rentals. Although the rental sector should be suffering due to a supply-demand issue, the operating efficiency and diversification of these companies' portfolios have helped them outperform its competitors.
“In some ways you could’ve closed your eyes and thrown a dart in multi-families and probably been fairly right, but each for different reasons,” said Richard Anderson, managing director of Equity Research at Wedbush Securities Inc.
According to a July 2024 rental report by Realtor.com, the 10 cities where renting continues to be more affordable than buying include: Austin, Seattle, Los Angeles, Nashville, Phoenix, Columbus, Dallas, San Francisco, New York and Boston.
Three of those ten cities: Seattle, Los Angeles and San Francisco are heavily covered by the big West Coast player, Essex Property Trust. ESS has shown much success outperforming its competitors, although it is geographically locked.
“I am not able to buy my own place yet, but owning a residential REIT like ESS lets me benefit from the housing market while I save up.” says Kyle Lakin, a 22-year old student in Orange County, California. Like Kyle, other California residents face high prices, low inventory and difficult loan requirements that prevent them from home owning.
Another big player is the Camden Property Trust. Its portfolio consists of bi-coastal and a core of Sun Belt properties. Its diverse portfolio has allowed it to ride out the risks and benefits of rental units on either coast or the Sun Belt region. One risk in the Sun Belt is the oversupply of developments in cities like Austin, Dallas, and Atlanta which adds pressure to the existing apartments.
“Demand is actually doing better than expected, we felt like the unemployment rate would be higher and as a result the demand for multi-family wouldn't be as strong,” says John P. Kim, head real estate research analyst at BMO Capital Markets Corp in New York.
The supply issue has been countered by the rising demand of new consumers, young college educated adults seeking out their own homes. According to the last U.S. Bureau of Labor statistics employment situation report, the unemployment rate for young adults with college education is at 2.5%, significantly lower than the broader U.S. population’s at 4.2%.
“Even though rental growth is slower this year, we are anticipating rental growth to pick up again by 2026,” said Kim.
Analysts anticipate the supply issue will be resolved within the next few years as the completions of properties are happening, and new development projects slow down. According to the latest U.S. Census monthly new residential construction report, the number of privately owned housing units completed are up 30.2% from last year, while new privately owned housing units authorized are down 6.5% less than last year.
Equity Residential, another player in the multi-family sector also has a bi-coastal focus and a growing stake in the Sun Belt region. EQR has taken measures to diversify its portfolio, expanding into the growing Sun Belt market. Last month Equity Residential announced the acquisition of a $964 million portfolio of Sunbelt apartments from Blackstone Real Estate strategies.
However, the majority of Equity Residential’s portfolio is doing well since supply dynamics favor the coastal cities they operate in, such as Boston, San Francisco, Washington DC, and Seattle have always had a high demand for rentals.
Rent control discussions in states like California are a possible cause for concern, since this would cap the rental revenue companies like ESS, CPT and EQR could make. According to the latest quarter’s earnings statements, all three companies have seen growth in income due to rising rental revenue, so a cap on rental prices could disrupt their growth.
Another big concern for the future of multi-family REITs is the effects the September 18th Fed rate cut could have. Although mortgage interest rates are not determined by the Fed, they are generally influenced by them which could mean lower mortgage rates.
The big question here is will the demand for apartments continue, if mortgage interest rates declined.
According to the latest Freddie Mac Primary Mortgage Market weekly survey, the 30-yr fixed income mortgage rate has dropped down to 6.09% already, down 1.1% from last year's rates.
The mortgage rates coming down could be headwind for multi-family REITs as it would lead to a decrease in demand for rentals.