Multifamily Rents May Feel Downward Pressures

Multifamily REITs have continued to show strong fundamentals through the first half of 2012, but with unemployment numbers still high, rent growth may begin to subside.

"One of the biggest challenges for the sector is stagnancy and unemployment," said Jim Stevens, an analyst with research firm SNL Financial. "The ability to drive up rents is being limited by trends in employment and salary increases."

With the U.S. unemployment rate floating just above 8 percent for the year and the Bureau of Labor and Statistics releasing a string of disappointing monthly updates, Stevens said multifamily REITs face some limitation on their ability to ask for higher rents.

This may explain why, despite positive fundamentals in the sector, multifamily REITs have underperformed compared to the broader REIT industry. As of Aug. 6, apartment REITs had total returns of 11.24 percent in 2012, according to data from the FTSE NAREIT U.S. Real Estate Index, compared to 17.01 percent for all equity REITs.

The sector last posted negative same-store net operating income (SSNOI) growth in the second quarter of 2010. Multifamily REITs have slowly climbed back to show strong positive growth, peaking at SSNOI of 9.4 percent for the first quarter of 2012, according to SNL's data.

Additionally, while rents may become stagnant if the economy continues to lag, increased rental and occupancy rates have driven NOI growth in the past 2 years, Stevens said.

Calvin Schnure, NAREIT's vice president for research and industry information, said vacancy rates declined another 20 basis points to 4.7 percent in the second quarter, the lowest they've been since 2001.

REITs, particularly those in top performing markets, were able to continue growing their rents from quarter to quarter.

"From the first to second quarter of 2012, rental rates in two of the most prominent apartment markets in the country, New York and Washington, D.C., increased by 1.6 percent and 1.0 percent, respectively," Stevens pointed out.

On a per-share basis, growth in the sector's funds from operations (FFO) was 17 percent for the first quarter and 26.7 percent for the second quarter of 2012.

"The sector has also decreased leverage to 35.7 percent as of June 30, down 2.4 percentage points from 38.1 percent at the end of 2011," Stevens said.