For REITs, it's hard to find acquisitions.

It’s not for lack of interest: Both Chicago-based Equity Residential and Arlington, Virginia-based AvalonBay Communities plan to expand their portfolios by acquiring apartments in Sun Belt markets like Dallas-Fort Worth, Atlanta, Denver and Austin, Texas. 

Equity’s guidance for 2024 assumes $1 billion in acquisitions and dispositions, noting that market conditions will dictate whether it reaches or exceeds these goals.

But there’s a problem: With the 60% slowdown in apartment transactions, acquisition opportunities were few and far between last year for the REITs that wanted to add to their portfolios. 

For REITs to start making acquisitions in 2024, the capital markets need to settle enough for a consensus on pricing to emerge, and buyers need to understand first-year rent projections in an uncertain rental market. Equity thinks opportunities will arise in the second half with more deals penciling out as supply burns off; others think 2024 will continue to be a slow year.

“There's still just a massive bid-ask spread between people who want to buy and people who want to sell,” Ric Campo, CEO of Houston-based Camden Property Trust, said on the REIT’s Q4 earnings call.

Seeking cap rate consensus

On Memphis-based REIT MAA’s Q4 earnings call, president and chief investment officer Brad Hill didn’t think pricing expectations were too far apart. Sellers, he said, expect cap rates to be in the low 5% range. 

“We still need to see some movement up in cap rates from where those expectations are for the market to really pick up,” Hill said. “So, it's an area that we continue to work on.”

Alec Brackenridge, chief investment officer at Chicago-based Equity Residential, has a similar sense of the market. “Buyers generally are looking for a 5.5% cap rate, and sellers generally are looking for something closer to 5%,” he said. “So, it's not an insurmountable gap, but right now, it's hard to peg things.”

On his REIT’s Q4 earnings call, Highlands Ranch, Colorado-based UDR’s President and Chief Financial Officer Joe Fisher put cap rates at “plus or minus 5%” right now, while AVB Chief Investment Officer Matt Birenbaum said the yield “has to at least be in the fives” for deals in the Sun Belt.

However, not all properties are the same, making it hard to make universal declarations about where cap rates sit. On AVB’s Q4 earnings call, Birenbaum called it a market of “have and have nots,” with primary markets still in favor.

“There are lots of assets that would fall into the have-not category because those are only going to transact if the cap rate is significantly north of the debt rate and the buyer can get positive arbitrage,” Birenbaum said. “So that would be tertiary markets and that would be some out-of-favor submarkets.”

Underwriting challenges

Asking cap rates aren’t the only obstacles to deals. Tepid rent growth and declining fundamentals have made it difficult for buyers to project incomes in their first year of ownership.

“There's some debate about what the year-one underwriting is because in some markets, obviously, [net operating income] is starting to decline,” Birenbaum said. “So that makes it a little tricky as well.”

But as some of the supply presumably burns off in the Sun Belt, the rental picture might look better for buyers in the first 12 months of ownership.

“Later this year, you'll be past some of that [supply], and your year-two number will look a little better,” EQR CEO Mark Parrell said on the company’s Q4 earnings call. “So, likely, [you’re] paying a higher price.”

Add potential interest rate cuts to stabilization in rents, and buyers might feel more comfortable. “It looks like lower rates [are coming]… and therefore, it's easier to create a model that works financially today with a falling rate scenario in the next two or three years,” Campo said. “But we're not there yet for sure in terms of that inflection point.”

But when that inflection point comes, there is no doubt many of the apartment REITs will be ready to strike. “We do think that attractive acquisition opportunities are going to start emerging later this year into 2025,” MAA CEO Eric Bolton said on the REIT’s Q4 earnings call.

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