10 Stocks that Could Benefit from Apartment Rental Rate Spike

Many apartment owners can't wait until 2012. If the economy recovers, they will be looking at a perfect storm of events - a shortage of available entry-level housing units, a boom in demand driven largely by Millenials (real-estate jargon for those just about ready to strike out on their own), and the ability to push rents significantly higher due to a shortage of suitable apartments.

Tom Bozzuto, CEO of the Bozzuto Group, a Greenbelt, MD.-based multifamily manager overseeing 28,500 units in the Mid-Atlantic states, told Multifamily Executive Magazine recently that "It's not a lot of fun right now to be in the apartment business. But, you take pleasure in knowing that this is the trough in the wave."

Other pros in the field feel exactly the same way.

Ron Terwillinger, chairman of the country's largest multifamily builder, Trammell Crow Residential based in Dallas, TX expects rents to increase 5% in 2010 and another 10% in 2011. "It looks to me like there will be a rental housing shortage in 2012 and 2013", he stated. This is due in part to the number of Milleniums that will need to get a place to rent and the large decrease in the number of new apartments constructed in 2008 and 2009 (the trend continues into 2010 at the earliest). The lead time from land acquisition to finished apartment complex of scale is generally three to four years. Also, there has been a decline in household formation (marriage, other family units) which indicates less demand for homes and more demand for apartments.

Another reason for rental increases is that there has been a rise in the number of (usually) small volume landlords who have begun to disregard preventive maintenance and basic repairs. In essence, they have cut costs short term at the expense of their apartment unit value long term. Some have just walked away from their investments in both urban and suburban neighborhoods and banks are usually terrible landlords, without a clue as to appropriate Property Manager selection or the art of running an apartment complex. These type of apartments often become vacant lots or, creatively, condominiums after a thorough rehab.

How can the investor play this theme? Here are some interesting stocks to consider that are pure apartment plays:

1. Apartment Investing and Management Company (AIV) $11.50.3.70%/$1.35b market cap
2. Avalon Bay Communities (AVB) $66.42/5.30%/$5.31b market cap
3. BRE Properties, Inc. (BRE) $28.13/5.30%/$1.49b market cap
4. Camden Property Trust (CPT) $34.92/5.20%/$2.24b market cap
5. Equity Residential (EQR) $27.81/7.00%/$7.63b market cap
6. Essex Property Trust, Inc. (ESS) $73.47/5.60%/$2.10b market cap
7. Home Properties (HME) $38.84/6.80%/$1.30b market cap
8. Mid-America Apartment Communities (MAA) $42.55/5.80%/$1.20b market cap
9. Post Propreties, Inc. (PPS) $16.04/5.00%/$712m market cap
10. UDR, Inc. (UDR) $13.25/5.50%/$2.0b market cap

All of the above have sustainable yields to entice the investor to wait for the positive apartment industry action to come.


The author does not presently have a position in any of the above securities. He does own a large position in rental real estate.

Comments

[John Bowman:]

In my area. I am noticing more and more families sharing a rented house with another family, or at least another relative. If the price of apartment rents increase rapidly, this may be the only alternative to many renters.

And if the economy never recovers, which I tend to believe, adult children will remain with their parents for a long time.

Aug 15 07:55 AM

[Dirk McCoy:]

Good article. Population growth in the United States is expected to remain steady and relatively strong. I think jobs and international competitiveness (including the ability of our entreprenuers to make money in foreign markets) will be key to sustaining that growth- otherwise, we could be looking at a spike in abortions and drop in birth rates (hmmm, not so sure- given abortions are covered in the proposed national health care plan- that's not some folks' plan).

The other factor to consider is that the internet is changing the way business is done, and the need for commercial real estate will either stagnate- or perhaps plummet. The solution to that is the time-honored one- conversion. There could be a great deal of previously very expensive Manhattan CRE space transformed into very expensive condo space- mitigating some of the upward pressure you envision.

And this scenario could play out all across the country- imaging 1500 sq. ft. of newly-refurbished 2BR units (complete with indoor pool and gym) going for $500/month...

Aug 15 01:31 PM