Apartment rents are finally easing after an incredible run. Here’s how to play it

An Apartment For Rent sign in Manhattan’s Upper East Side.

Adam Jeffrey | CNBC

Apartment rental growth appears to have peaked after a huge rush in 2021, and that could boost some of the real estate stocks that were early darlings of the pandemic.

According to RealPage, nationwide rents rose just 0.8% between June and July, a third of the growth over the same period a year ago. On an annual basis, rents rose 12.2% in July, compared to 13.8% year-on-year growth in June.

Cooling comes amid a drop in affordability. Rental growth has outpaced income growth over the past 20 years, but the coronavirus pandemic has widened that gap, particularly in the pricier coastal markets.

Landlords slashed rents in 2020 as tenants fled urban areas, only to return in 2021 and even more so this year. The new tenants are younger and tend to have lower incomes, pushing landlords to pay higher rates.

Also, in 2020, landlords offered incentives to get tenants in the door, such as B. free months or adapted rental conditions. The removal of some of these stimulus in 2021 means tighter growth comparisons from 2021 to 2022 as the baseline has stabilized.

Additionally, a tremendous amount of new supply is flooding the market, with around 420,000 new housing units expected to be completed this year, according to RentCafe. The last time the 400,000 mark was exceeded was in 1972. Much of this new inventory is located in New York City as well as in the Sunbelt area.

The shift presents an interesting opportunity for investors in residential REITs, which have rallied sharply in the first two years of the pandemic but have recently fallen — in large part due to rising interest rates rather than fundamentals. REITs are generally high-yield, so they’re typically a low-interest rate game for investors.

Read  Central banks drove this vital skill out of investor brains. Here's how to relearn it.

But not all residential REITs are created equal: Expensive coastal markets could see rates fall further, while the Sunbelt, which started out cheaper and still sees strong demand, could see persistently higher rents.

“The Sunbelt never had the Covid discounts,” said Alexander Goldfarb, managing director at Piper Sandler.

Rent as a percentage of income has seen an uptick in the Sunbelt, Goldfarb said, hinting at a potential long-term reconciliation between regions.

“Everyone says that people in the city are just willing to pay, but what we found is that rents in the sun belt have been increasing faster and rents have been reported as a percentage of income – that figure normalized between the sun belt and the coasts. Sunbelt people were willing to pay more. Coasts stagnated,” he said.

As a result, Goldfarb said he’s bullish on REITs that are more sunbelt-focused, like Camden Property Trust and Mid-America Apartment Communities. The same cannot be said for coastal REITs like AvalonBay, Equity Residential and UDR, Inc. He also likes Essex Property Trust because although it’s primarily a west coast REIT, its properties are mostly in the suburbs.

In addition to apartments, rents for single-family homes are also falling. Rents rose 13.4% year over year in June, according to CoreLogic — a slower annual growth rate than in May.

However, strong rental demand for both single and multi-family homes is unlikely to abate too much given home sales are falling so dramatically. With mortgage rates still significantly higher than they were at the start of this year and house prices still high, some consumers have little choice but to rent.

Read  ‘Becoming kin’ explores how to heal from lingering effects of colonization

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button