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Apartment REITs Achieve Needed Lift

Publicly traded apartment REITs in February recorded their largest rent-growth increase since September 2015, as performance of seven of the nine REITs increased and occupancy was up for the first time in five months.

The REITs recorded 1.3% annual effective rent growth in February 2017, some 37 basis points (bps) higher than January’s 1.0%, but still 306 bps lower than the 4.4% of February 2016. February’s increase was the largest since a 57-bps rise in September 2015.

February’s rate also closed the gap with the national rent-growth figure, which increased 10 bps to 2.3%. The 92-bps difference was the narrowest since May 2016.

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Investors and property owners will also be glad to hear that, as that same-store average effective rent increased for the second straight month, to $1,901 in February.

One major reason for the rent-growth increase was the stronger performance in many markets with large concentrations of REIT properties. For example, San Jose and New York both returned to positive rent growth in February after spending several months in negative territory, and San Francisco drew more than 100 bps closer to even.

The Metropolitan Statistical Areas and Metropolitan Divisions among Axiometrics’ Top 50 apartment markets with the highest annual effective rent growth in February were:

  • Sacramento, CA (9.0%)
  • Riverside, CA (6.7%)
  • Fort Worth, TX (5.4%)
  • Las Vegas, NV (5.2%)
  • San Diego, CA (4.7%)
  • Seattle, WA (4.6%)
  • Salt Lake City, UT (4.6%)
  • Orlando, FL (4.5%)
  • Phoenix, AZ (4.4%)
  • Long Island, NY (4.3%)

 MSAs underperforming the national average included:

  • Portland, OR (2.1%)
  • Miami, FL (1.9%)
  • Chicago, IL (1.7%)
  • Boston, MA (1.7%)
  • Philadelphia, PA (0.9%)
  • Austin, TX (0.6%)
  • San Jose, CA (0.1%)
  • New York, NY (0.0%)
  • San Francisco, CA (-0.5%)
  • Houston, TX (-3.3%)


Occupancy Snaps Decline Streak

After four straight months of decline, REIT occupancy increased by 8 bps to 95.8% in February from 95.7% in January. The occupancy rate was essentially the same as the February 2016 rate, and REIT occupancy continues to outperform the national rate, which was 94.5% in January.

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Though Year-to-Date (YTD) rent growth in February is still too early to determine a trend for the year, the start of 2017 shows some positive movement.

YTD growth increased 144 bps to 1.7%, the second highest post-recession February rate, behind only the 1.8% of February 2010.

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February’s rate was 22 bps above the post-recession average of 1.5%.

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REITs Outperform Market in 5 Top Metros – Until Recently

REITs are some of the biggest institutions in the apartment industry. While the specific strategy of each REIT differs in an effort to gain a competitive advantage, it is inevitable that many markets will have a heavy REIT presence.

Considering markets with greater than 100,000 units, the five markets with the heaviest REIT presence are San Jose, Washington, Anaheim, Seattle and Oakland. These markets were determined as having the highest percentage of all units in the market belonging to REIT properties, according to Axiometrics apartment market research.

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The most immediate trend visible here is that four of the five markets are in the West. Additionally, two of the top five are San Francisco Bay Area markets (with San Francisco’s 6.0% share of REIT units barely missing the cut).

It is too simplistic to say that what is happening in these five markets dictates the entire performance of all REIT portfolios (after all, this is why REITs specialize in portfolio diversification). It is worthwhile though to analyze the performance of these top five markets in comparison to the performance of REIT properties within these markets.

A couple of notes: REIT properties are included in the overall market numbers, and Monogram Realty (MORE) was excluded from the calculations to preserve same-store integrity.

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Among these top five REIT markets, there are two periods that immediately jump out. The first is the early recovery period, when annual effective rent growth for the five markets peaked near 6.9% in June 2011. The second was more recent, peaking in March 2015 at 5.6%.

Considering this rent growth is a weighted average (based on the number of units in each market), an average effective rent growth of 4.0% is impressive. In almost every market across the nation, owners and operators would be more than pleased with an average rent growth of 4.0% (by comparison, the long-term average for the nation is 2.3%).

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How have the REITs compared against these market averages? More often than not, the answer is  that the REIT portfolio in these markets has outperformed the market itself.

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As evidenced by the preceding chart, it is easy to say that not only have the REITs in these markets outperformed the market average, but in many instances the peaks are comfortably above the market average.

In June 2011, the REIT properties had an annual rent growth of 8.3% (a 131-bps spread from the market average of 6.9%, although the gap was actually 219 bps the month before). In March 2015, the REIT properties averaged 6.3% annual rent growth (128 bps higher than the market average of 5.6%).

The following chart further illustrates the spread between the market average and the REITs in these markets. The market average of 4.0% is easily surpassed by the REITs’ average of 4.8%.

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The notable exception to this overall trend is the past eight months. April 2016 was the first time since March 2010 when the REITs in top five markets fell below the market average.

The REIT average has not spent much time below the market average. After two months behind the markets in 2010, the REITs outperformed the market until last year. The current run, however, has seen eight consecutive months in which the REITs’ average has been below the market average.


Acquisition Target Milestone Again Leads Rent Growth

As mentioned above, seven of the nine publicly traded apartment REITs achieved higher annual effective rent growth in February than in January. Ironically, the biggest gainer and the REIT rent-growth leader is the company that may soon leave the ranks of the REITs – Milestone Apartments (MST.UN).

MST.UN’s rent growth increased 163 bps to 4.3% in February, far ahead of second-place Equity Residential (EQR) and its 2.8%. Milestone, however is in the midst of being acquired by Starwood Capital for a reported $1.7 billion, although the approval process has been delayed. MST.UN postponed a unit-holders meeting from March 7 to March 28 and extended the approval vote to March 24.

Starwood reportedly is considering increasing its offer.

MST.UN also had the highest average rent growth over the past 12 months, 5.1%, ahead of Mid-America Apartments (MAA), which checked in at a 12-month average of 3.2%. UDR once again had the highest occupancy rate, at 96.8%, with Essex Property Trust (ESS) second at 96.5%.

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Accessing the Data Files

The data files can be accessed by logging into the AXIOPortal®. Go to the Publications tab, select “Trend Report” under Category, then search for “REIT” in the “Search Publication Name” box. Select “REIT” in the Type dialogue box.

Student Housing REIT information can be accessed by clicking on the Publications tab, then, under Category, selecting “REIT Report” under the Student Housing section.

Please note that Aimco (AIV) does not allow its properties to disclose occupancy rates. Axiometrics readjusts AIV's occupancy data after each quarterly earnings release. Between releases, we apply the average REIT growth rate in each market to AIV's properties. We apply the submarket's average growth rate if there is no REIT presence in the market.

Remember that rent and occupancy levels in those files are not same-store throughout time, but the growth rates are same-store for each month. You may view how the unit counts change at the bottom of the Effective Rents tab. The file with "Rolling 13 Month" in the name represents annual changes by month.


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