Dive Brief:
- Multiple apartment REITs have been downgraded by Wall Street analysts as the supply challenges for both new and existing properties in the Sun Belt markets took center stage in the recent round of third-quarter earnings calls.
- Joshua Dennerlein, equity research analyst for REITs at Bank of America, moved Houston-based Camden Property Trust and Memphis-based MAA from neutral to underperform in October. The analyst downgraded UDR from buy to neutral.
- Wells Fargo Head of REIT Research Jaime Feldman downgraded UDR from overweight to equalweight in November based on the assumption that the Highlands Ranch, Colorado-based REIT will deliver below-average core funds from operations in 2024.
Dive Insight:
Feldman sees more risk in REITs with Sun Belt apartments due to weak visibility on rents in a heavy supply environment, he said in a note to clients summarized by SeekingAlpha.
Dennerlein also pointed to concerns around supply. “We believe rental price growth will become a compounding issue for the industry as peak deliveries of new supply are still several months away and interest rates are on the rise,” he wrote in a note to clients summarized by SeekingAlpha.
Investment bank and financial services company Piper Sandler's Alexander Goldfarb, managing director and senior research analyst, also sees deteriorating conditions for a number of REITs due to several factors.
“The 3Q23 apartment calls are among the most interesting we've experienced in our two-decade career as the confluence of rising rates, supply and pandemic-fostered bad debt conspire against apartments despite the strength of demand,” Goldfarb wrote in an analyst note.
Goldfarb downgraded MAA from overweight to neutral due to supply pressure weighing on new rents. He also cut Camden and UDR from neutral to underweight.
“While supply has been a constant this year, the sudden recent convergence of stubborn bad debt and aggressive lease-up concessions by merchant builders increasingly nervous about rising interest rates have hit Camden and UDR particularly hard,” Goldfarb wrote.
However, there were some upgrades. Goldfarb moved Arlington, Virginia-based REIT AvalonBay Communities from neutral to overweight due to its developments started during the COVID-19 pandemic, delivering yields of more than 7%. “Further, we believe its market-affordable rents provide insulation to competitive supply,” he wrote.
Beyond 2024, the picture looks better for apartment REITs across the country, according to Goldfarb. “Despite our downgrades, we believe 2025 could be a strong year given the lack of building behind this current delivery wave and growing housing shortage,” Goldfarb wrote.
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