The real estate market remains weak foreclosures, over supply, shadow inventory, tightening lending standards, and still high prices relative to Americans' incomes will continue to put downward pressure on housing. Foreclosures have also caused millions to shift homeowners to renters. One of the biggest beneficiaries of these trends is apartment REITs, as individuals who were previous home buyers are now renting. I am bullish on apartment REITs because consumers either cannot afford or desire to buy a house anytime soon and a slowdown in building will limit supply.
The demand for apartments has risen with Even during the recent economic downturn rents have risen past their 2007 highs across many major cities such as Chicago, the Silicon Valley, and Washington DC. The housing market will continue to be weak for the next five years, so the long term demand is still there. Even if the economy weakens even further, apartments will do well as most people will take the needed desperate measures to pay rent and avoid homelessness. With people being kicked out of the their homes, apartments are the place to go.
Another growth driver for apartment REITs that the pent up demand of young adults who still live with their parents. If the job market improves, these people will get good jobs and move out to their own apartment. On the other hand, if the economy falters, young people may become too much a strain for parents who are struggling to get by or save for retirement. As a result these people may be forced to move out and rent a place to stay.
Below I have listed three leading apartment REITs and described some key features of each one.
AvalonBay Communities (AVB)- AvalonBay is America's largest apartment REIT that owns 164 apartment communities in Northern California, Southern California, the NY/NJ metropolitan area, New England, and the District of Colombia. They specialize in luxury apartments. AVB pays a 2.96% dividend yield and earnings are expected to grow at 14% per year over the next five years. They specialize in luxury apartments.
Home Properties Inc. (HME)- Home Properties pays out the highest yield of the major apartment REITs with a 4.55% dividend yield. They own 125 properties that are predominately on the East Coast, whose rents have held up better than the Midwest and the Western United States. They are trading currently just 9% above their 52 week low and has the lowest P/E ratio (albeit still high at 74) of three REITs mentioned.
BREProperties Inc. (BRE)- BRE Properties is a REIT that owns 84 properties in four Western States (California, Colorado, Arizona, and Washington). They pay a 3.19% dividend yield and among these REITs have the lowest debt/equity ratio of 1.03. They also have a high gross margin at 67%.
Out of these REITs I think that Home Properties is the best bet of the three as their focus in the East Coast and its high dividend yield. However, I expect all three REITs to continue to outperform other forms of real estate investments due to strong demographic trends favoring apartments.