Why are apartment REITs slightly under performing the REIT sector in 2016? (1) The micro-economic numbers are less attractive. Those numbers will soon follow. (2) The dividend growth rates are slightly slowing. AVB and CPT announced dividend increases with their earnings releases in early February - and the growth rates slowed. The MAA pace slightly increased.
The big picture: (This is news from January of this year.)
The national apartment vacancy rate climbed 10 basis points in the fourth quarter to 4.4%, according to Reis. This marked the second consecutive quarter that vacancy ticked up for the multifamily sector, something that hasn't happened since the third and fourth quarters of 2009. Ryan Severino, senior economist and director of research at New York-based Reis, believes that the two-quarter decline represents a turning point in the U.S. apartment market. "With construction outpacing demand, the national vacancy rate should slowly drift higher over the coming years," writes Severino in the report.
Reis reports that while demand and supply have been largely in balance between mid-2013 and mid-2015, that has started to change over the last two quarters. Construction exceeded absorption by 12,350 units in the third quarter and 15,263 units in the fourth quarter. For comparison, construction only exceeded demand by 3,471 units in the second quarter. "With construction continuing to increase and net absorption generally stabilizing, this rift should continue to widen over time putting further upward pressure on the national vacancy rate," writes Severino.
For 2015, the total number of units completed was 188,306, according to Reis. This is the highest figure since 1999 when the total was 188,870 units. With the pipeline continuing to swell, Reis expects construction for 2016 to exceed 2015's total.
Reis reports that the uptick in construction comes at a time when new units are taking longer to lease up compared to the first half of 2015. The 34,155 units absorbed in the fourth quarter was down from the 37,243 absorbed during the third quarter and the 49,810 absorbed during the second quarter, and the 45,618 absorbed during the fourth quarter of 2014. Construction during five of the last six quarters has been around 50,000 units.
"Although demand is not poised to completely implode, this downward trend in net absorption is worrisome at a juncture when construction shows no sign of abating," writes Severino. "Although demand could certainly bounce back up in 2016, the heady absorption figures from 2012 are not likely to return during this phase of the cycle."
While demand will like outpace supply for the foreseeable future, landlords have been able to push rents at a higher pace than any year since the recession. During 2015, asking and effective rents grew by 4.5% and 4.6%, respectively, which outstrips 2014's growths rates of 3.7% and 3.9% for asking and effective rents. Severino believes that the gap between new construction and absorption will eventually hamper owners' ability to raise rents at such a high clip.
"Eventually, rising vacancy rates will take the wind out of landlords' sails and remove some of their ability to keep pushing rent growth at such a febrile pace," writes Severino. "That is not to say that rents at the U.S. level will decline anytime soon, but it will be instructive to watch some of the most expensive markets. If their rental growth rates falter, it will surely depress the overall U.S. data."
The stats:Apartment Update for 02-19-16
Yields are calculated on the Q4-15 dividend. The percent change numbers are since the first of the year - with the exception of the change in the dividend. The LTM or Last Twelve Month dividend change is since Q4-14. The last 3 years numbers is the annualized dividend change since Q4-12. On 6-22-15 HME agreed to be purchased by Lone Star Funds for $75.23/share.
|Share Price||16 FFO Est||Q1-16||Div/||Div/||Percent Change||LTM||Last 3yr|
|Company and ticker||1-01||02-19||1-01||02-19||Yield||FFO16||FFO17||Price||Pr+Div||FFO||Target||Div||Div|
|Apartment Investment and Management||(NYSE:AIV)||40.03||36.14||2.37||2.28||3.65||57.89||53.23||-9.72||-9.72||-3.80||-1.43||17.86||12.50|
|Avalonbay Communities Inc.||(NYSE:AVB)||184.13||170.11||8.24||8.33||3.17||64.83||60.27||-7.61||-6.88||1.09||-0.77||8.00||8.72|
|Camden Property Trust||(NYSE:CPT)||76.76||73.84||4.85||4.85||4.06||61.86||59.06||-3.80||-2.83||0.00||-1.44||7.14||11.31|
|Essex Property Trust Inc.||(NYSE:ESS)||239.41||207.12||10.89||10.94||2.78||52.65||48.65||-13.49||-12.89||0.46||-2.67||10.77||10.30|
|Mid-America Apartment Communities||(NYSE:MAA)||90.81||91.60||5.81||5.86||3.58||55.97||52.73||0.87||1.77||0.86||2.90||6.49||6.00|
|Post Properties Inc.||(NYSE:PPS)||59.16||54.63||3.16||3.16||3.22||55.70||52.69||-7.66||-6.91||0.00||-1.33||10.00||25.33|
|American Campus Communities, Inc.||(NYSE:ACC)||41.34||43.63||2.49||2.30||3.67||69.57||58.82||5.54||6.51||-7.63||3.02||5.26||6.17|
|Education Realty Trust, Inc.||(NYSE:EDR)||37.88||39.37||1.95||1.79||3.76||82.68||69.48||3.93||4.91||-8.21||5.79||2.78||7.78|
|Student Housing Average||4.74||5.71||-7.92|
|The cap weighted Dow Jones REIT ETF RWR has a price change of -6.38% year to date - with dividends its total return is -6.38%.|
|The cap weighted Vanguard ETF VNQ has a price change of -5.39% year to date - with dividends its total return is -5.39%.|
|The Cohen & Steers 'Realty Majors' ETF ICF has a price change of -6.33% year to date - with dividends its total return is -6.33%.|
The price/FFO numbers usually make sense when you know the weighted average cap rates for the properties each REIT holds. I do not have those current numbers.
Apartment Price/FFO Ratios 02-19-16
|FFO / Share||% FFO Growth||Price/FFO||16 FFO Range|
Disclosure: I am/we are long AVB, UDR.