During 2011 the multifamily sector within the REIT universe (defined by the FTSE NAREIT All Equity REIT index) turned in the second highest total return for the year (behind storage) at 15.3%. This shouldn't come as a surprise, as the sector (as well as storage) are two of the biggest beneficiaries of the housing bust. Folks turning in the keys and need a place to live and a place to store their surplus stuff.
This naturally leads to the question: Will the party continue, and, importantly, how can investors profit from it?
The Multifamily Industry
The current multifamily industry can be characterized as one where demand is outpacing supply. The percentage of the population entering into the "renter zone" (20-34 years old) continues to increase, while the percentage of people leaving homes and renting also continues to increase. This, when combined with below-normal supply (starts) creates a favorable industry environment.
Source: EQR/US Census/NMHC
So with starts (supply) below the "normal rate," what about demand?
Source: EQR/Green Street
Keep in mind that 75% of the 2.3 million jobs created since March 2010 have gone to the 20-34 age group, creating a situation where this age group can pay rent. Now, the two combined:
The supply/demand imbalance has created favorable trends within the industry where, according to Marcus and Millichap, metro area completions are down 67%, effective rents are up 2.7% (would expect this to trend higher) and vacancies are down 1.5% to 5.6%. (Full article/data can be found here M&M Multihousing 2/12)
So demand looks like it is outpacing supply, which is obviously a good sign. But as we know, where there is a supply/demand imbalance, market participants (or new entrants) will undoubtedly fill the void (and typically shift the balance in the opposite direction). From NAREIT:
As the demand for rental housing increases, so does the pace of multifamily construction activity in most markets, according to research from the National Multi Housing Council (NMHC), an apartment industry association.
Two-thirds of the respondents to the NMHC's quarterly survey of its members, which was released Oct. 27, said they have noticed an increase in activity in their markets in terms of either the construction or the planning stages of new development. Specifically, 20 percent noted that developers are breaking ground on new projects at a "rapid clip." Meanwhile, nearly half reported that pre-construction activity, such as acquiring land and lining up financing, has increased.
"Powerful demographic trends, changing attitudes about homeownership and tighter mortgage underwriting continue to drive a shift toward renting, which is fueling a ramp up in new construction," said Mark Obrinsky, NMHC's chief economist. [Full article: NMHC on new development.]
Obviously participants see the demand and recognize that supply is below normal levels and are stepping in to fill the gap. While this is a risk (over-supply and the resulting pricing pressures), it is more of an intermediate-term risk, as development takes time. Bottom line: demand should outpace supply for the near future and give multifamily owners continued pricing power, which should translate into higher FFO and distributions, and therefore cause the sector to outperform.
Below I list a number of the larger sector participants and some key data for each, which should help narrow down the investment focus.
Source: Company financials. Missing data was not listed or readily available.
While this list is not all-inclusive, it covers a large geographical segment of the multifamily universe and allows an investor to take exposure to the industry. Yields are below other sectors of the REIT universe, but the difference has been made up by capital appreciation as shown below (from NAREIT):
In conclusion, I recommend multifamily exposure as a part of any REIT portfolio, or a general portfolio, due to the favorable operating environment and prospects for relative outperformance.