Occupancy and leasing gains made by multifamily REITs in 2011 are expected to continue into 2012, according to industry analysts.
More consumers prefer the apartment lifestyle over buying a home, according to Haendel St. Juste, analyst with KBW. He said that a key issue for REITs next year will be not only where their assets are located, but the types of tenant they have.
“Those REITs that have the high-quality assets are getting an increasing amount of renters by choice, people who want to remain more mobile,” he said. “This is the higher-end consumer with a better education and a better income.”
With the prime demographic for multifamily renters being between the ages of 20 and 34 years old, as the “echo boomer” generation continues to grow, St. Juste said landlords will continue to have pricing power and continue to push rents higher. He added that this demographic is less affected by the jobs downturn if they have a bachelor’s degree.
However, he said while rental pricing gains will continue to be made, the multifamily sector’s momentum may slow.
“We are certain that multifamily REITs are starting to get tested as to the extent of their pricing power,” he said.
Jason Lail, senior industry analyst with SNL Financial, noted that some analysts are currently projecting that lower-end apartment units have peaked in regards to rent growth. “There could be a growing disparity in the near term between rent growth for high-end and low-end apartment units,” Lail said.
In terms of performance fundamentals, Lail said multifamily REITs have consistently outperformed the broader REIT market in 2011 when it comes to growing their same store net operating income (SSNOI). At the end of the second quarter, multifamily REITs posted SSNOI growth more than 2 percent higher than all equity REIT growth in the same period, Lail noted.
Data from SNL also illustrate that multifamily REITs have consistently reduced leverage since 2008, dropping debt as a percent of their total capitalization from 56.4 percent at the end of 2008 to 35.16 percent at the end of the second quarter of 2011.
St. Juste said the lack of supply of new apartment developments has also helped the multifamily sector. With no new developments in the pipeline, renters are flocking to the same apartment buildings, creating a classic supply-demand scenario. St. Juste predicted that there will be no new supply until the second half of 2013.