In the latest edition of Fundamentally Speaking, Calvin Schnure, NAREIT’s vice president for research and industry information, discussed some of the latest developments in the residential REIT sector.
Schnure attributed the strong performance of residential REITs in 2014 to a growing economy. He noted that solid earnings in the second quarter indicate the sector's performance is living up to expectations in terms of funds from operation and same store net operating income. Fundamentals such as rising occupancy rates and rent growth are driving that performance, according to Schnure.
“Many of the [residential] REITs raised their guidance for 2014 and for 2015,” Schnure commented. “The people who are operating these apartments see good demand out there. They’re very comfortable with the outlook.”
Schnure said he expects that residential REITs will continue to see gains in the near term.
“This is more than just the spring leasing season,” Schnure remarked. “This is the fundamental forces of pent-up demand coming into play.”
In terms of risks to the sector, Schnure cited new development. More supply should hit the market soon, according to Schnure. Additionally, the sector faces the possibility that the single-family housing market could attract potential renters towards home ownership. However, he downplayed either as significant threats.
“Those risks are there, but they are much smaller than this level of pent-up demand,” Schnure said. The number of new rental households cropping up exceeds the amount of new housing units coming online, Schnure said, as is the case when it comes to renters moving on to buying their own homes.
“There are a lot of people who are concerned about those risks,” Schnure noted. “People who are following the market should keep in mind that the stronger economy has more wind behind it than those risks are going to be a drag.”