REIT Rankings: Apartments
Are you considering investing in apartment Real Estate Investment Trusts (REITs)? Well, you're in the right place! In this article, we will delve into the world of apartment REITs and explore why it's a renter's market.
Within the Hoya Capital Apartment REIT Index, we track all fifteen exchange-listed U.S. apartment REITs, which collectively account for roughly $120B in market value and comprise about 10% of the Equity REIT Index. These apartment REITs collectively own roughly 600,000 rental units, representing a relatively modest 2.5% market share of the 23 million apartment units across the United States.
Apartment REITs have become some of the most active multifamily homebuilders in the country, with a focus on the upper tiers of the market. Their average rents are higher than the national average of around $1,350 per month. These REITs have evolved into "fully-integrated" owners and operators of multifamily communities.
Given the importance of market-level scale for efficient residential property management, apartment REITs tend to adopt a geographic focus. Larger apartment REITs typically adopt a regional focus, while smaller ones focus on individual markets. The major Coastal REITs include Equity Residential (EQR), AvalonBay (AVB), Essex (ESS), UDR (UDR), and Apartment Income (AIRC). On the other hand, the major Sunbelt-focused REITs include Mid-America (MAA), Camden (CPT), Independence Realty (IRT), and NexPoint Residential (NXRT). Centerspace (CSR) focuses primarily on Midwest and Mountain West markets. Some of the newer apartment REITs are even more geographically concentrated. Veris Residential (VRE) - formerly Mack Cali - derives around 80% of its revenues from the New York City metro region, while Elme Communities (ELME) - formerly Washington REIT - operates almost exclusively in Washington, DC.
Now, let's dive deeper into the macro fundamentals of apartment REITs.
Apartment REIT Fundamentals
Apartment REITs were among the weakest-performing property sectors for a second-straight year in 2023 as residential rents decelerated following two years of record-setting growth. While the Hoya Capital Apartment REIT Index produced total returns of 7.2% in 2023, lagging behind the Vanguard Real Estate ETF (VNQ) and the S&P 500 (SPY), apartment REITs reported average FFO growth of 20% in 2022 and are on track to record 5% growth in 2023 based on recent guidance.
Apartment REITs experienced a slowdown in rent growth, but renewal rent growth remained relatively healthy at around 5%, offsetting the increased concessions on new leases.
Recent data and forecasts from leading multifamily data providers indicate a steady normalization in rent growth and a modest uptick in vacancy rates. The rental market "crash" predicted by many experts has yet to materialize, as demand remains robust. Favorable factors such as solid job growth, homeownership unaffordability, favorable demographics, and elevated inbound immigration continue to drive demand.
Supply concerns remain, as new development projects have flooded the market. However, the overall level of supply growth appears manageable. Markets with the strongest demand, such as Dallas, Houston, Phoenix, Austin, and DC, have seen the most new supply. Renewal rent growth has remained relatively healthy, offsetting the increased concessions on new leases.
Apartment REITs delivered average FFO growth of 19.7% in 2022 and are expected to achieve 4.5% growth in 2023. Despite the underperformance over the past two years, Apartment REITs have been some of the strongest-performing REITs over most long-term measurement periods. Larger, coastal-focused REITs reported stronger results, while supply headwinds affected Sunbelt-focused REITs.
When it comes to balance sheets and external growth prospects, larger apartment REITs are typically well-capitalized and command investment-grade credit ratings. Some smaller apartment REITs operate with elevated debt levels. The challenging financing environment for new ground-up development is expected to ease, providing an opportunity for well-capitalized REITs to grow externally.
Apartment REITs pay an average dividend yield of 4.1%, slightly below the sector average. Near-perfect rent collection during the pandemic allowed apartment REITs to not only avoid dividend cuts but also raise their distributions. They have delivered average annual dividend growth of roughly 4% since 2015.
In conclusion, despite the recent challenges faced by apartment REITs, there are deep discounts and opportunities for growth as supply worries ease. Demand remains robust, driven by various factors, including solid job growth and favorable demographics. Apartment REITs have proven to be resilient in the face of adversity and offer attractive dividend yields.
For a comprehensive analysis of all real estate sectors, check out our quarterly reports on various sectors.
Disclosure: Hoya Capital Real Estate advises two Exchange-Traded Funds listed on the NYSE. Hoya Capital is long all components in the Hoya Capital Housing 100 Index and in the Hoya Capital High Dividend Yield Index. Index definitions and a complete list of holdings are available on our website.