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Multifamily Not Likely to Repeat '06

Don't expect multifamily REITs to repeat this year's stellar performance in 2007. According to analysts at Bank of America, the fact that public apartment firms outpaced their counterparts in 2006 was mainly due to cap rate compression and significant growth in earnings caused by their significant pricing power.

By Sule Aygoren Carranza | Updated on December 26, 2006

New York City —Don’t expect multifamily REITs to repeat this year’s Sule Aygoren Carranza is managing editor of Real Estate Forum and editor of Multi Housing forum, from which this article is excerpted.

stellar performance in 2007. According to analysts at Bank of America, the fact that public apartment firms outpaced their counterparts in 2006 was mainly because of cap rate compression and significant growth in earnings caused by their significant pricing power. Multifamily REITs should outperform for the third year in a row in 2006, with a 40% total year-to-date return versus 36% for the overall REIT sector.

However, this is not likely to occur next year. Rather, performance should be more moderate in the near term, and valuations for multifamily REITs already reflect expectations of continued fundamental strength. This will probably put a check on further gains in share prices. BofA senior analyst Ross Nussbaum anticipates “modest multiple contraction, implying flat stock prices and a 0% to 5% total return,” and puts a marketweight rating for public apartment companies.

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