REIT Sector Focus: Multifamily REITs Benefit from Housing Market Woes

6/10/2011 | By Carisa Chappell
As “echo boomers,” the name given to the children of baby boomers, move out on their own and more renters decide to part ways with family and roommates, the demand for apartments is growing in the United States, according to Jason Lail, senior industry analyst with SNL Financial.

Lail echoed the general consensus among analysts that multifamily REITs are benefiting from the downturn in the homeownership market, with sector fundamentals going strong across the board.

“The housing market crash does appear to have had a positive effect on the multifamily space,” Lail said.

Lail added that multifamily REITs have benefited from depressed home prices coupled with less than accessible financing. Those two factors are driving members of the echo boom generation to delay purchasing a home. Instead, they’re choosing to move into rental apartments, Lail said.

As a result, multifamily REITs have come out of the recent recession much faster than the other industry sectors.

“From a performance perspective, multifamily REITs certainly appear to be outperforming the broad REIT market,” Lail said.

Multifamily REITs experienced median year-over-year growth in funds from operations (FFO) of 9.8 percent for the first quarter of 2011, according to SNL data. Lail noted that the broader measure of all equity REITs showed no growth during the same time period.

The change in same store net operating income (SSNOI) tells a similar story, Lail noted. Multifamily REITs witnessed median SSNOI growth of 5.8 percent, compared to 1.8 percent for all equity REITs.

“Multifamily REITs have also been able to reduce median leverage, measured as debt to total capitalization,” Lail said. The sector’s measure of debt to total capitalization fell from 46.3 percent in the first quarter of 2010 to 36.7 percent in the first quarter of 2011, he said.

In terms of rent and occupancy rates, both numbers are moving upward. Lail said the median occupancy rate for multifamily REIT portfolios has improved by 50 basis points from the first quarter of 2010 to the first quarter of 2011.

In addition, Lail said multifamily REITs have continued to benefit from greater access to capital than they have had in previous years from Fannie Mae and Freddie Mac.

“If trends continue in home pricing, along with a difficult financing market, the echo boomer generation could very well be the driver of continued occupancy and rent increases going forward, as they focus on long-term rentals in lieu of single family home acquisitions,” Lail said.

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