Multifamily REITs Riding High Renewal Rate Into Peak Apartment Leasing Season

Optimism abounded on the first-quarter earnings calls of the country’s largest multifamily real estate investment trusts.

Rents are up, concessions are down, and most of the REITs reported all-time lows in the percentage of residents moving out to purchase a house.

Multifamily's consistent rent growth has been a sticking point in the Federal Reserve’s plans to cut interest rates — but buying a home is even worse, multifamily developer CEOs said in their first-quarter earnings reports.

Equity Residential saw that outside of its four expansion markets — Dallas-Fort Worth, Atlanta, Denver and Austin — the REIT has seen “terrific demand” met with little new supply, resulting in above-average rent growth, President and CEO Mark Parrell said on the REIT’s Q1 earnings call last week.

Rent growth was also boosted by resident retention, as the percentage of Equity Residential residents leaving units to buy homes in the first quarter was 7.8%, Parrell said. That is a continuation of all-time lows. 

“We also see a little competition from owned housing as the high cost of homes, combined with elevated financing costs and rapidly rising insurance, real estate ta, and maintenance cost, combine to make rental housing a very attractive option for many people,” Parrell said, adding that smaller households and delayed marriage and childbearing add to rental housing’s attractiveness. 

Basically every REIT touted its own statistic on how much more expensive it is to buy in its markets versus living in its properties and how that has set new records for retention. Camden Property Trust attributed 9.4% of its Q1 move-outs to residents purchasing a home, the lowest ever for the company. Essex Property Trust has traditionally seen about 12% of residents move out to purchase homes, but that is now down to about 5%, President and CEO Angela Kleiman said.

AvalonBay Communities determined it is more than $2K per month more expensive in its markets to own versus rent a home, President and CEO Benjamin Schall said.

The labor market's performance is another sticking point in the Fed's plans to drop rates, and multifamily REITs are benefiting from affluent renters with solid incomes. 

Camden is seeing consumers spending less of their take-home pay on apartments, CEO Ric Campo said on his company's Q1 earnings call. New Camden residents are spending just 18.8% of their incomes on rent. 

Essex has seen a similar trend.

“Wages [are] growing faster than rents in Essex markets,” Kleiman said.

While retention is strong, new demand is also setting records. Camden Property Trust and UDR each saw 100,000 apartment units absorbed in the first quarter, which is the best Q1 absorption for both REITs in two decades. 

Deliveries were at a 30-year high during the quarter, though, limiting rent growth in most of Camden’s markets, Campo said. Nashville and Austin are the REIT’s markets with the most supply coming online, and both saw rents slip, executives said during the call.

Deliveries will make up 3.8% of stock throughout the Sun Belt in 2024, which is significantly more than historical averages, AvalonBay Communities' Schall said.

“With the lease-up of a typical project taking an additional 12 to 18 months, the pressure on rents and occupancy in the Sun Belt will last at least through the end of 2025, if not into 2026,” Schall said.

New delivery is expected to peak this year, Campo said. March apartment starts were the weakest since April 2020, dropping 53% from peak volume. 

Despite the influx of new units, average concessions have dwindled since the third quarter of 2023, according to UDR Senior Vice President of Operations Michael Lacy. 

“Peak deliveries are still right around the corner, but at the same time, it's during peak demand,” Lacy said.

UDR’s average Sun Belt market concessions ranged from three to six weeks in Q3, Bisnow previously reported. Now concessions in Texas average 1.5 weeks, while concessions in Florida average half a week, Lacy said. UDR's Sun Belt assets are seeing 96.5% to 96.7% occupancy.

Essex Property Trust’s average concessions are down to 3.5 days, Kleiman said.

After coronavirus-era back rent began to flow for apartment landlords last quarter, this quarter brought further shortening in eviction processing time and long-term delinquent units recovery time for Essex Property Trust, leading to a lower rate of residents delinquent on rent. 

Essex is adjusting its full-year guidance to increase its midpoint of same-property revenue growth to 2.25%, Chief Financial Officer and Executive Vice President Barb Pak said. The increase was largely driven by rent delinquency improving faster than original expectations, she said. 

As Camden predicted on the previous quarter’s earnings call, its bad debt owed by renters moderated this quarter. Levels of bad debt were even lower than anticipated, as all municipalities the REIT operates in have lifted restrictions on evictions, Camden Chief Financial Officer Alex Jessett said. 

“Some delinquent renters did repay past-due amounts,” Jessett said. “But more often we simply received the benefit of having our real estate back, the opportunity to commence a lease with a resident who abides by the rental contract and lower bad debt from having a new resident who actually pays.”

This is a stark turnaround from late last year when a rising number of tenants not paying rent and avoiding eviction was complicating the strong fundamentals of tenants staying in apartments.