Real estate investment trusts have faced a difficult environment this year. New supply is now overtaking demand, and even though demand continues strong in apartment REITs, the deliveries of new supply nationwide are at very elevated levels, something that is especially difficult after also being elevated in 2014 and 2015.
Analysts expect supply to be strong in 2017 as well. Analysts think the market needs time to absorb the new inventory.
Same-property fundamentals in terms of rent growth are decelerating and REITs are beginning to maybe lose occupancy in some of their properties. Analysts say, however, that investors anticipated the slowdown, and this part of the REIT market has underperformed REITs as a whole.
Analysts also say the acquisition market is overpriced. They say it’s a good time to sell, but its hard to reinvest those proceeds, so the capital has had to be returned to shareholders.
Geographically, as location is always key in real estate, analysts say New York City and San Francisco have seen the most weakness. There has been a large amount of supply growth in San Francisco, which is expected to end in 2018.
In New York City, demand has decelerated as well. Job growth has decelerated, especially growth in high paying jobs, which correspond to the type of workers who are able to afford and have been preferring high-priced luxury apartments. Supply has continued to grow in Manhattan and in the surrounding areas, such as Hoboken and the outer boroughs.
Other regional markets have fared better. Analysts say Southern California’s supply growth has been modest, and demand growth was slower than Northern California. They say this has caused momentum to build up, especially as demand growth has how continued to be strong.
Seattle has seen positive trends as well. There is a large amount of new supply, but there has been increased migration of technology workers from the Bay Area to Seattle because the price points are much lower: it’s cheaper to do business, and it’s cheaper to live. Rent growth has been strong, but analysts expect more growth.
As for other types of REITs, analysts are positive on student housing. They say this segment has is less correlated with the economy and more with enrollment trends.
In the second quarter, analysts saw many of the apartment REITs moderate their guidance for the year, mostly owing to developments in in New York City and San Francisco. Investors probably expect the third quarter to be the same.
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