Apartment REITs: Tale Of Two Americas

Summary

• Best of times or worst of times? Apartment REITs have a front-row seat to the burgeoning economic divide as the "urban exodus" continues to add fuel to the "suburban renaissance."
• While vaccines may eventually reverse recent dynamics, rental rates and occupancy levels have plunged in the high density, coastal "shutdown cities" that employed more draconian lockdown measures.
• Meanwhile, Apartment REITs focused on Sunbelt and suburban markets delivered a solid year of FFO and NOI growth in 2020, and rental rates continue to trend higher in early 2021.
• Outside of the troubled urban metros, national apartment markets have been remarkably resilient throughout the pandemic. Apartment REITs' exposure to the troubled markets is more limited than valuations suggest.
• With gains of nearly 15% this year, apartment REITs aren't as cheap as they were in late 2020, but valuations still appear compelling as the U.S. housing industry continues to lead the early economic recovery.
• This idea was discussed in more depth with members of my private investing community, Hoya Capital Income Builder. Learn More »

REIT Rankings: Apartments

(Hoya Capital Real Estate, Co-Produced with Colorado Wealth Management)

Apartment REIT Sector Overview

The best of times or the worst of times? Apartment REITs have had a front-row seat to the burgeoning economic divide enflamed by the pandemic as the "urban exodus" continues to add fuel to the "suburban renaissance." Rental rates and occupancy levels have plunged in the coastal "shutdown cities," but for REITs, this weakness has been largely offset by strength in Sunbelt and suburban multifamily markets. Within the Hoya Capital Apartment REIT Index, we track the 14 largest apartment REITs, which account for roughly $125 billion in market value and more than 500k housing units.

Outside of the troubled coastal metros that dominate the headlines and drive the investment narrative, national apartment markets - along with the broader U.S. housing industry - have been remarkably resilient throughout the pandemic. Per the Zillow (Z) ZORI Rent Index, the median U.S. apartment market has actually seen an acceleration in rent growth over the last year to 3.9% led by Sunbelt markets and coastal suburban markets. Meanwhile, the value-weighted average has slowed to just 0.3%, dragged down by the "shutdown cities" - New York, San Francisco, Chicago, Los Angeles, Seattle, Boston, and Washington D.C. - which have seen a sharp plunge in rental rates.

Importantly, apartment REITs' exposure to the troubled markets is more limited than current valuations suggest and we believe that valuations appear compelling. Even among the six most impacted coastal REITs - Equity Residential (EQR), AvalonBay (AVB), Essex Property (ESS), AIMCO (AIV), Apartment Income (AIRC), and UDR, Inc. (UDR) - these REITs portfolios are skewed heavily towards the highest-tier of the quality spectrum that has not experienced the degree of occupancy loss and missed

Analyst’s Disclosure: I am/we are long HOMZ, AMT, ARE, AVB, BXMT, DRE, DLR, EFG, EQIX, FB, FR, MAR, MGP, NLY, NHI, NNN, PLD, REG, ROIC, SBRA, SPG, SRC, STOR, STWD, PSA, EXR, AMH, CUBE, ELS, MAA, UDR, SUI, CPT, NVR, EQR, INVH, ESS, PEAK, LEN, DHI, HST, AIV, MDC, ACC, PHM, TPH, MTH, WELL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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