Four Multifamily Strategies to Navigate the Current Environment

Apartment REITs have performed generally well and can attest to solid balance sheets, enhanced options to raise capital and strong operational discipline, according to RealPage’s report on the year’s second quarter earnings calls. But at the same time, they are facing challenging conditions in both their industry and the overall economic environment. 

In response, many multifamily REITs are calling on four strategies to overcome the current biggest hurdles.

Diversify markets. Doing so helps offset supply headwinds, particularly in the Sun Belt region. It also helped increase investment activity in the second quarter when many of the successful REITs were located in smaller, secondary markets such as Midland/Odessa, Texas, Salisbury, Md., and Spokane, Wash. In fact, 17 out of the top 20 markets were in these kinds of smaller metros. Some also emphasize rebalancing their portfolio across geographic regions where the pandemic showed weaknesses in specific area strategies. For example, Equity Residential used this tactic to expand beyond its coastal markets into other high-growth areas such as Denver, Dallas, Austin and Atlanta. The company also balanced urban and suburban assets to lessen issues that COVID-19 created in more densely populated urban cores.

Rely on different investment strategies. In other words, there’s no single recipe that works everywhere, and companies are trying to differentiate what they do to set themselves apart. Coastal REITs performed well in the second quarter, after experiencing steep declines following the pandemic’s beginning. Equity Residential reported that it benefited from solid demand combined with limited new inventory on its coastal properties. Essex Property Trust targeted supply-constrained markets along the West Coast as its primary investment strategy. AvalonBay Communities reported that two-thirds of its portfolio is in suburban coastal markets with less competition from new supply compared to the Sun Belt areas. And another example of finding a way to set itself apart came from Independence Realty Trust, which used a value-add Class B strategy in its Sun Belt market, where it targeted larger key markets with strong job and population growth. 

Play up demand drivers. What’s driving the train, so to speak? Whatever it is, gets the focus. All REITs look for markets where there’s strong job growth, particularly in high-income employment sectors, RealPage reported. Many find them by comparing employment and household growth rates with apartment inventory growth projects to weigh a market’s viability and lease-up possibilities. It then integrates submarket diversification strategies to make the deals work, the report said. Mid-America Apartment Communities focused on job growth and a steady employment market with strong in-migration, which helped it offset the impact of high supply. Some REITs emphasize wage growth more where coastal markets typically outperform. Other REITs use luxury Class A assets to attract higher-income residents.

Offset costs with increased required returns. Many REITs have revised required asset returns up because of increased operating costs, which may include insurance, utilities and taxes. This has the effect of reducing apartment starts along with portfolio adjustments. But as a group, REITs are affected less by the cost of capital than other sectors within commercial real estate, so a reduction in starts is driven more by rebalancing investment requirements versus difficulty in securing capital, the report says.