Apartment rental prices appear to have peaked after huge gains throughout 2021, and experts say that could help boost some real estate stocks that performed well at the start of the pandemic.
Between June and July, rents rose just 0.8%, just a third of the growth seen in the same period a year earlier, according to data from RealPage. Annually, rents in July increased by 12.2%, compared to an annual growth of 13.8% in June.
Rents are cooling at a time when apartments are becoming less affordable. The problem is that rent growth has outpaced income growth over the past 20 years. That briefly changed at the start of the pandemic when landlords slashed rents in early 2020, at a time when tenants were fleeing urban areas. However, as people returned in 2021, rental prices rose again. However, these new tenants tended to be younger, with lower incomes, which meant that landlords could not raise rents as much as they would like.
Landlords also offered incentives to keep people coming back, including free months in their lease or adjusted terms. Last year, many landlords removed some of these incentives, making it harder to make real rental growth comparisons from 2021 to 2022.
What’s keeping rental prices from rising now is a massive supply of new apartments coming onto the market. RentCafe said it expects 420,000 new apartments to be completed this year, a fifty-year high in the United States. Much of this new inventory is located in New York and the Sunbelt region.
Economists say the change creates an attractive opportunity for apartment REIT investors. REITs soared in the first two years of the pandemic, but have recently slowed due to rising interest rates. In general, REITs are known to offer high yield, which means they are usually preferred by investors when interest rates are lower.
However, REITs vary depending on where they are located. On the East Coast, rental rates are likely to fall, while on the Sunbelt, which was cheaper to begin with and is still seeing strong rental demand, rents could rise further.
Piper Sandler’s Alexander Goldfarb told CNBC that the Sunbelt has never seen the same COVID-related discounts as expensive coastal markets because that’s where many people have fled. He sees potential in the area because the rent as a percentage of income has gone up there.
“Everyone says people are just willing to pay in town, but what we’ve seen is that Sunbelt rents have gone up faster and rents are a percentage of income,” Goldfarb said. “This number has normalized between the Sunbelt and the coasts. Sunbelt residents were willing to pay more. The ribs stagnated.
Goldfarb says he’s still bullish on apartment REITs focused on the Sunbelt, which includes companies like Camden Property Trust and Mid-America Apartment Communities. Although he is less optimistic about the outlook for REITs such as AvalonBay, Equity Residential and UDR, which are centered on the coasts.
Meanwhile, data from CoreLogic shows single-family home rents are also softening lately. In June, rents rose 13.4% from a year earlier, a slower rate of growth than the previous month.