Apartment rents are finally falling after an amazing price hike. Here’s how to play it

Apartment rent growth looks set to peak after a bout of panic in 2021, and that could boost some of the real estate stocks that were the initial darling of the pandemic.

According to RealPage, rents across the country increased by just 0.8% between June and July, a third of the growth seen in the same period a year ago. On a year-over-year basis, rents in July increased 12.2%, compared with a 13.8% year-on-year increase in June.

The cooling comes amid a decline in affordability. Rent growth has outstripped income growth over the past 20 years, but the coronavirus pandemic has pushed that divide, especially in the more expensive coastal markets.

Landlords have cut rents significantly in 2020, as tenants move out of urban areas, only to return in 2021 and to increase even more strongly this year. New tenants are younger and tend to have lower incomes, forcing landlords to cut back on higher rates.

In addition, landlords have introduced incentives in 2020 to attract tenants, such as free months or adjusted rental terms. The removal of some of those incentives in 2021 means a tougher growth comparison from 2021 to 2022 when the baseline is stable.

Moreover, a large amount of new supply is flooding the market, with about 420,000 new apartments expected to be completed this year, according to RentCafe. The last time completions surpassed 400,000 was in 1972. Much of that new inventory was in New York City, as well as in the Sunbelt area.

This shift creates an interesting opportunity for investors in apartment REITs, which skyrocketed during the first two years of the pandemic but have recently declined – in large part due to rising interest rates rather than to other developments. basic factor. REITs generally have high yields, so they tend to be a low-interest game for investors.

But not all condo REITs are the same: Expensive coastal markets could continue to drop rates, while Sunbelt, which has been cheaper in the first place and is still in high demand, could see prices higher rent is maintained.

Alexander Goldfarb, managing director at Piper Sandler, said: “Sunbelt has never had Covid sales.

Rents as a percentage of income have seen an uptick in Sunbelt, Goldfarb said, suggesting a likely long-term balance between regions.

“Everybody says people are just willing to pay in the city, but what we’ve found is that Sunbelt’s rents are rising faster and rents as a percentage of income – that number is normalized between Sunbelt and the coast. People in Sunbelt are willing to pay more. Coasts are stagnant,” he said.

As a result, Goldfarb said he is optimistic about REITs that are more concentrated in Sunbelt, such as Camden Property Trust and Central American Apartment Community. The same is not true, he said, of coastal REITs such as AvalonBay, Equity and UDR, Inc. He also likes Essex Property Trustbecause while it is largely a West Coast REIT, its properties are mostly located in the suburbs.

In addition to apartments, single-family rents are also falling. According to CoreLogic, rents increased 13.4% year-on-year – a smaller annual growth rate than in May.

However, strong rental demand for both single-family and multi-tenant rentals is unlikely to ease too much given the steep decline in home sales. With mortgage rates still significantly higher than they were earlier this year and home prices still hot, some consumers have no choice but to rent.