Apartment REITs Increase Guidance After Strong Quarter

The first quarter is hardly the time for apartment REITs to think big picture. That comes in Q2 and Q3, which reflects their performances during the prime leasing season, which is from May to September.

However, Q1 results met or outpaced expectations and a few increased elements of their full-year guidance as a result, according to a recent post by RealPage.

Demand drivers are improving, according to most, which pointed this out early on their calls.

Most notably, job growth is on the upswing with the National Association of Business Economics (NABE) increasing its job growth estimate to a much inflated 1.6 million new jobs in 2024, up from the prior estimate of 700,000 jobs.

“Job quality was mentioned as a factor to consider, however, as many of these new jobs may be part-time or lower paying,” writes RealPage’s Meggan Taylor. “Still, improved employment has contributed to additional upside on near-term REIT performance expectations.”

RealPage, too, has slightly strengthened its forecast after Q1 based on economic factors.

Another recurring point during earnings calls is that renting remains more affordable than buying because interest rates remain high for would-be homeowners, for-sale stock is limited, and home ownership remains out of reach for many.

Taylor writes that AvalonBay Communities reported that “[in our markets] it’s more than $2,000 per month more expensive to own versus rent a home.” Likewise, Essex Property Trust stated, “The median cost of owning a home is 2.5 times more expensive than renting in our markets.”

A 2023 study commissioned by RealPage found that 73% of American renters say they cannot afford to buy a house in the area where they currently rent.

There are historically low levels of apartments saying that their move-outs are due to home purchases. AVB reported this rate of around 7%, down from the long-term average of more like 17%. At ESS, that rate fell to 5% from around 12% historically.

Equity Residential reported its rate of loss to homeownership shrank to 7.8%. Also reporting historically low rates of move-outs to home purchase were MAA (12.9%) and UQR (10%), according to RealPage.

Supply continued to drive a bifurcation in rent performance, among major multifamily REITs.

As far as locational performance, the low supply in coastal markets supported rent growth and high-supply Sun Belt operators achieved limited rent change.

Charlotte and Austin were mentioned as concession hot spots ranging from about one month free to nearly five months free in certain hard-hit Austin submarkets.

As for housing permits, it has slowed in the Sun Belt and across REIT expansion markets, and REITs are expected to see rent growth return as demand drivers remain solid under moderating supply.

“New supply is expected to remain manageable on the coastal markets as well,” Taylor writes.

Speaking to its California strategy, ESS said the “lengthy and costly entitlement process effectively deters housing supply,” in many West Coast and especially California markets. To this point, ESS reports, “total housing permits as a percentage of stock continues to remain well below 1%,” in their California markets.