10/25/2012 | by
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Apartment REITs, especially those with properties in coastal markets, will benefit from a housing shortage in the coming years, according to Jonathan Litt, managing principal of Land and Buildings Investment Management LLC.

Litt said in a report that experts are predicting a housing shortfall of 1 million homes annually. Additionally, starts on new properties in the multifamily sector are 60 percent below the units needed to keep up with the demand.

Litt noted that both apartment REITs and homebuilders have historically witnessed strong returns in prior housing recoveries.

"Coastal apartment REITs historically generate four to seven years of 6 percent to 8 percent average net operating income (NOI) growth in recoveries," said Litt, adding that it's still early in the coastal apartment same store net operating income (SSNOI) growth cycle.

The report illustrated that in the mid- to late 1990s economic recovery, coastal apartment same-store net operating income (NOI) averaged 7.65 percent over a seven-year period. In the recovery of the mid-2000s, SSNOI  for coastal apartments averaged 5.8 percent over a four-year period.

REITs with a high concentration of apartments on the coasts, such as AIMCO (NYSE: AIV) and BRE Properties (NYSE: BRE) are best-positioned to capitalize from a housing shortage for a number of reasons, according to Litt. They include stronger household income growth to support high rent growth,  limited new construction and the high cost of homeownership, according to Litt.

The overall homeownership rate overall has declined 50 basis points in 2012, and Litt pointed out that further declines are forecasted, which which supports the ongoing demand for apartments.

In a list of the highest projected rental growth markets from 2013 to 2016, the top five are all in the western United States: Los Angeles, San Francisco, Phoenix Oakland and Santa Ana-Irvine, Calif. Select markets not located on the west coast, including Newark, Washington and Atlanta, made it into the top 15 markets in terms of projected rent growth.

The coastal markets also should benefit from expected annual job growth of 2.2 percent from 2013 to 2016, according to Litt.

"Job growth will unlock pent-up demand from doubled-up households," Litt said. "Income growth in key coastal markets is already surging, supporting apartment pricing power."