With sector fundamentals trending up and leverage ratios heading down, commercial real estate analysts say the signs point to multifamily REITs continuing their strong run.
Research firm SNL Financial is projecting revenue growth in the sector this year on the order of 4 percent to 6 percent. Funds from operations (FFO) are projected to rise at least 9 percent during that same period. Meanwhile, the sector's average ratio of debt to total capitalization moved down in the last two years from 51.2 percent at the end of 2009 to 38.1 percent at the end of 2011.
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Jason Lail, manager of the real estate research group at SNL, attributed the sector's bullish outlook to a number of factors. Younger tenants are choosing to "unbundle" and move into their own separate apartments, driving up demand for apartments, Lail explained. They're expected to have more money to do so, too. Salary offers for members of the 2012 graduating class are approximately 4.5 percent higher than they were for 2011 graduates, according to the National Association of Colleges and Employers, and companies expect to hire 10.2 percent more graduates than a year ago.
"These younger tenants appear to view single-family homeownership a bit differently, and, in many cases, prefer multifamily rentals thanks to their greater flexibility and central locations in most cities," Lail said.
Stiff mortgage requirements and a limited new supply of apartments also continue to drive multifamily demand in 2012. The average occupancy at the end of 2011 for SNL-covered multifamily properties in the United States was 94.6 percent, up 90 basis points from the 93.7 percent average occupancy at the end of 2009.
"The boon in rental living, combined with the near-bust in supply over the prior three years led to strong rent growth for the industry," according to Mark Obrinsky, the National Multi Housing Council's (NMHC) chief economist.
In the NMHC's annual ranking of the top 50 apartment owners and managers nationwide, released in April 2012, the organization said that there was no dominant strategy employed by apartment firms to capitalize on the surge in the rental market.
"Some pursued aggressive acquisition programs, while others took advantage of growing investor interest in apartments to be net sellers of non-core assets," said Obrinsky, adding that REITs were among the largest net sellers.