Market Overview

Rising Rents Help Propel REIT Stocks


The rate of growth in rental prices may have slowed in hot-tech markets like San Francisco, but investors in apartment real estate investment trusts aren’t yet fretting.

By one measure, rents in the second quarter rose 4 percent in the U.S., marking a slowdown from the 5 percent rise in the fourth quarter that marked the biggest jump in rents since the dot-com boom of the early 2000s.

But even 4 percent is a stronger-than-average market, given that rents are still rising well above the long-term national average of about 3 percent a year. It’s just that the country’s strongest markets are no longer San Francisco and New York. San Francisco rents increased 4.7 percent in the second quarter, but that was well below the nearly 10 percent rise in the same quarter a year earlier. San Jose rents grew 3.6 percent, after a 10 percent rise last year as well.

Both San Francisco and New York have experienced a construction boom that may finally be limiting how much owners there can raise rates. In San Francisco, about 5,100 new units — the most in 26 years — are expected to be listed for rent this year. In Manhattan, 5,675 apartments will be added.

Mid-tier markets fuel rent rises
Meanwhile, the mid-tier markets that have been slower to crawl out of the housing crisis are driving the country’s rise in rental prices. Sacramento led the country in rent growth, with a 9.7 percent jump in the second quarter. Phoenix took fourth place, with 7.6 percent annual rent growth, while Las Vegas rose to 11th place with a 6.4 percent rise. These markets have seen little new supply built since the recession, so rent increases could continue if demand rises even modestly.

With rents continuing to rise above long-term norms, the stocks of apartment REITs have followed in kind. The Renter Nation motif has gained 15.9 percent in the past 12 months. In that same time period, the S&P 500 Index has risen 1.7 percent.

In the last month, the motif has increased 4.4 percent.

While REIT stocks did have a hiccup earlier this spring amid reports San Francisco and New York rental markets were getting tougher, they got back on track early last month after Avalon Bay Communities Inc (NYSE: AVB) told investors it expected second-quarter revenue to meet its projection earlier this year. It said it anticipated year-over-year rental revenue increases of 4.9 percent to 5.1 percent for established apartment communities open at least a year.


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Brexit boost?
With REIT stocks outperforming most sectors so far this year, many investors may start to wonder what will continue to drive them higher. To some, the answer may come from across the pond – specifically, the U.K.’s decision to leave the European Union, commonly and tirelessly referred to as Brexit.
One consequence of the Brexit vote could very well be the short-term drop in the value of British real estate as the government attempts to negotiate out of the EU while seeking trade deals of its own.
The resulting fall in prices could lead real estate investors who are active in the UK to look elsewhere for rising markets. And U.S. REITs could likely look more attractive. Longer-term investors would certainly welcome the infusion of new bids that take their stocks even higher from here.
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