Multifamily REITs Face Slower Growth

Equity Residential is seeing fewer development opportunities, CEO David Neithercut said recently.

N EW YORK CITY—Analysts at Barclays predict a more muted growth environment for multifamily REITs as the year progresses, especially in the second half. “While we remain constructive on apartment fundamentals, we think there is limited upside from here,” according to a Barclays report issue Friday. Analysts cite “the lukewarm market reception” to the recently announced results for the fourth quarter of 2015 and the REITs’ full-year guidance for 2016. For starters, after digesting REITs’ recent guidance as well as meetings with their management teams, Barclays is expecting fewer quarterly earnings reports this year to beat consensus estimates. “We expect peaking new supply and moderating job growth (particularly on the West Coast) to constrain organic growth this year,” according to Barclays, which is projecting a deceleration of 53 basis points in the sector’s growth overall this year, and says that same-store NOI will decrease 83 bps year-over-year. RBC Capital Markets recently noted that apartment REITs’ average SSNOI guidance of 5.1% is 50 bps less than the actual results the apartment trusts obtained in ’15. The year’s last six months will be telling, in the view of Barclays analysts. “As we move into peak leasing and turnover season during the second and third quarter, pricing power for the apartment REITs will be tested,” according to the report, which cites Reis data showing that effective rents grew 4.7% in ’15. Although preliminary Q1 revenue and renewal lease data is “encouraging,” the report states, “we think the back-half of the year is more important to forward prospects given the predictable earn-in from existing leases during the first half of the year. We’re curious to see how rents hold up on the West Coast and in CBDs where new supply will be concentrated.” In all, about 232,000 new apartments are slated to come on line by year’s end, the report states, using Reis data. Nonetheless, Barclays is still forecasting rent growth of better than 4% this year. “Because the apartment rental market is so tight, and demand is likely to remain robust, it could take a year or two of supply exceeding demand before rent growth normalizes to near inflation levels.” While deliveries will be up this year, Barclays notes that “nearly all apartment REITs are reducing their development pipelines as both land and construction costs remain expensive.” On Equity Residential’s Q4 earnings call last month, CEO David Neithercut told analysts that in terms of development, “We just look for opportunities and when we find ones we think make sense for us, we will not be shy pursuing them. But they are just getting more and more difficult to find.” At the same time, Barclays notes, “apartment operators are selling into a historically low cap rate environment—and in some cases returning profits directly to shareholders,” as EQR is doing. With dilution expected outside of the REITs’ same-store portfolios, Barclays analysts expect cash available for distribution and funds from operations both to decelerate this year. Amid “a year of peaking national apartment supply,” especially in CBD markets, Barclays expects “the most diversified apartment REITs” to have the best shot at success. Accordingly, Barclays notes that Apartment Investment and Management Co. is among the few operators to forecast accelerating organic growth this year. “We  agree with management given AIV’s diversity by both geography (which is generally protected from new supply) and price point.”