Slowing Rent Growth, Shrinking Profits Show Multifamily REITs Coming Back To Earth

Historic levels of apartment construction and weaker renter demand have brought multifamily landlords’ financial performance more in line with historical levels, coming down from the fevered high of 2021.

But despite the relative softness in the market and the economic headwinds that have buffeted the real estate sector, the largest publicly traded owners of multifamily properties have reported continued profits and growing rents in their fourth-quarter earnings calls with analysts in recent weeks.

“We're still having people come in after [renters] when they do move out, willing to pay more than what we were asking the renewing resident to pay,” Mid America Apartment Communities Chairman and CEO Eric Bolton said during a Feb. 2 earnings call. “That to me, is a fairly strong indicator that the market is still holding up quite well.”

Rents are projected to grow by 2% to 3% this year, according to a J.P. Morgan Chase report released Tuesday and shared with Bisnow. The bank's residential REIT analysts said the sector will be helped in part by the 517,000 jobs the economy added in January, despite the recent spate of mass layoffs among some of the country’s largest corporations.

“We’re not seeing any real evidence, significant evidence building in any of our markets at this point relating to employment weakness or people losing jobs," said Bolton, whose company is projecting 3% rent growth in 2023. "We’re not having any kind of issues surrounding collections."

Those rent projections are in line with the average annual growth rate of 3.15% since 2000, but a far cry from recent history. Average rents in the U.S. rose 13.5%, then again by 6.2% last year, according to Yardi Matrix.

The projections of rent growth somewhat counter Fannie Mae's prediction in January of rents turning negative at the start of 2023 after only rising by 1.5% at the end of the year as demand for apartments cools off.

Apartment renters absorbed 15,600 units in the fourth quarter, down from 52,800 in the third quarter, according to CBRE. A wave of new construction helped push the overall vacancy rate up to 4.6%, nearly double what it was in the first quarter of 2022.   

What's more, a record number of apartments are expected to deliver across the U.S. this year and next, testing the depth of apartment demand, especially given a softer employment market, according to Green Street’s 2023 U.S. Apartment Outlook.

J.P. Morgan's report on the residential REIT sector noted that elevated supply poses the greatest risk to landlords this year.

"Over the past couple of years, strong job growth, wages, and migration trends drove outsized demand for rental housing that resulted in absorption of delivered units and higher rents across REIT portfolios," J.P. Morgan analyst Anthony Paolone wrote in the report. "2023 may not be as straightforward fundamentally. With supply running higher, the reliance on demand is that much greater to keep rents moving up, and this is while the economy is expected to slow."

While REIT executives projected confidence in their outlook for this year, most of their firms, such as MAA, Apartment Income REIT Corp., Camden Property Trust, AvalonBay Communities and Equity Residential, saw profits shrink at the end of the year.

AvalonBay reported rental income rising 11% in Q4 over the previous year, but its net income dropped 28% to $241M, according to Securities and Exchange Commission filings. Equity Residential’s Q4 net income fell year-over-year from $561M to $165M while rental income rose from $645M to nearly $700M.

AIR Communities’ fourth-quarter rental revenues increased year-over-year from $191.9M to $205.5M, but its net income dropped by more than $45M, according to SEC filings. Camden saw net income fall from $217.8M to $47.4M in the fourth quarter despite a property revenue increase from $305.3M to $375.9M.

MAA bucked the trend, reporting both increases in rental revenues — $463.5M in Q4 2021 to nearly $528M in Q4 of 2022 — and an $8M year-over-year increase. Bolton said its portfolio in the Sun Belt benefited from people moving to the region during the fourth quarter. 

“You look at the migration trends, we still saw 12% of the leases that we did in the fourth quarter were for people moving into the Sun Belt from outside the Sun Belt,” Bolton said. “We’re not seeing any evidence of people coming in, talking about losing their job … and needing to get out of their lease. We’re not seeing any roommating trends starting to pick up.”

The ongoing housing shortage allowed the REITs to increase rents on existing units, between 5% to more than 20% over the previous year. That same-store rent growth is expected to moderate to the single digits this year, various REIT executives said during earnings calls.

For instance, Equity Residential’s 2022 same-store revenue growth topped 10%, “the best in EQR’s history of nearly 30 years as a public company,” Chief Operating Officer Michael Manelis said during a Feb. 10 earnings call.

“In most of our markets, we had a supercharged spring leasing season with more robust pricing power that started earlier than usual in the year,” Manelis said. “Reported turnover for both the full year and the fourth quarter was the lowest in the company’s history, reflecting great demand that produced high occupancy and significant pricing power.”

Some executives said that the exhaustion of government rental assistance funds would eat into collections this year. AvalonBay Chief Operating Officer Sean Breslin said the company received $36M in relief funds last year, and the lack of that money this year will somewhat eat into earnings.

But despite the expiration of most rent relief funds and headlines about widespread layoffs, more renters are paying rent on time. And for the ones that aren’t, the expiration of eviction moratoriums has given the landlords increased power to remove them and replace them with a rent-paying tenant.

“Bad debt is expected to improve. Residents are increasingly paying rent on time. And in the cases that they don’t, our options for collections are returning to pre-Covid norms,” Apartment Income REIT Corp. President Keith Kimmel said on a Feb. 10 earnings call. “At the beginning of 2022, we had 1,000 residents more than two months delinquent, and today, that is down to 250. Of those residents, a vast majority are now in the collections process.”

BMO Capital Markets Managing Director John Kim said the wave of evictions for delinquent tenants will likely boost the financial performance of residential REITs moving forward, especially as the last remaining eviction moratoriums are lifted in various states.

“It definitely looks like it’s normalizing and it definitely will be a tailwind to earnings,” Kim said.