Apartment Occupancy Rising Again As Mortgage Rates Approach 7%

Why you might need to work 50 hours per month to pay your rent

November 14, 2024

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Happy Thursday! The week began with the Fed cutting interest rates again, this time only by 0.25%. Still, the markets were delighted and the post-Election Day rally continued with the Dow climbing over 44,000 for the first time on Monday. On Wednesday, the October Consumer Price Index (CPI) came in at 0.2% and 2.6% annually, matching Wall Street’s expectations. The October Producer Price Index (PPI) released on Thursday, was up 0.2% and 2.4% annually, also in line with expectations. The Core number, up 0.3% with a 3.1% annual rate also matched the street’s view.

Still, only about 40% of all REITs were trending higher and the benchmark Vanguard Real Estate Index Fund ETF (NYSEARCA: VNQ) was down by 0.46% as of Thursday morning. Office REITs were quite weak but strength was seen in residential, hotel and retail REITs.

In this issue, third-quarter apartment vacancy levels drop to two-year lows, and the 30-year mortgage again flirts with 7%. Check out the REITs that as a result, have been crushing Wall Street predictions for months.

—Ethan Roberts

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ONE BIG THING

Apartment Occupancy Rising Again As Mortgage Rates Approach 7%

What: Despite a construction increase from 450,000 to a record high of 518,000 completed units year-over-year, commercial real estate company CBRE reports that third-quarter apartment vacancies declined for the first time in over two years. Demand continues to be strong as home prices show little signs of coming down and the 30-year mortgage rate ends this week at 6.92%.

The vacancy rate has now fallen to 5.30%, close to the long-term average of 5.0%, despite an influx of newly constructed apartment buildings that Wall Street erroneously believed would provide Residential REITs with too much competition to keep occupancy levels high.

Wrong!

Why: Wall Street thought that the new apartment construction would decimate the occupancy rates of existing communities, especially since many new communities have been boasting fancy new amenities such as bowling alleys and doggie spas.

But hey guys, it’s not 2019 anymore, and materials and labor costs are much higher these days. New construction and upgraded amenities come with heavy price tags. So the demand for the older units continues and move-out numbers continue to be lighter. Rents rose 0.3% during the third quarter due to an ongoing strong demand for apartment rentals.

Who: Residential REITs that own apartment communities have reaped the benefit of the strong demand, with stocks like AvalonBay Communities Inc (NYSE: AVB), Camden Property Trust (NYSE: CPT) and Mid-America Apartment Communities Inc (NYSE: MAA) all surging higher over the last nine months. The total returns of those REITs since March 1 are 31.68%, 30.48% and 28.37% respectively.

By contrast, single-family home REITs such as American Homes 4 Rent Class A (NYSE: AMH) and Invitation Homes Inc (NYSE: INVH) have only returned 2.57% and -0.47% over that same time, as cash-strapped young Americans flock to less expensive rental units.

Takeaway: With no let-up in the mortgage rates or home prices, investors can expect the apartment REITs to continue to perform well. A 7% mortgage rate will likely keep renters stuck where they are for longer, and an increasing number of those in their 20s who leave the parental nest will need an affordable place to live. In addition, with the Biden administration out of the White House, student loan forgiveness will likely end, meaning that renters with student loans will have more difficulty coming up with down payments and will likely have higher debt-to-income (DTI) ratios.

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WHAT WALL ST. SAID ABOUT REITS THIS WEEK

Sun Communities Inc (NYSE: SUI) On November 7, Baird analyst Wesley Golladay downgraded Sun Communities from Outperform to Neutral and lowered the price target from $145 to $126. Golladay was disappointed that SUI cut its 2024 core FFO guidance from $7.06-$7.22 to $6.76-$6.84, well below the $7.07 consensus. Golladay noted the sluggish operating environment will likely continue near-term but some improvement could be forthcoming from SUI’s plan to restructure and cut costs.

Later that day, RBC Capital analyst Brad Heffern maintained SUI at Outperform but lowered the price target from $147 to $135. In addition, BMO Capital’s John Kim maintained SUI at Outperform while lowering the price target from $145 to $138.

Public Storage (NYSE: PSA) On November 8, Heffern also maintained a Sector Perform rating on Public Storage but lowered the target price from $358 to $344. Heffern noted a mixed bag of results in PSA’s Q3 results. FFO and revenue both missed estimates but the guidance was about the same. Management points to stabilizing demand with some market occupancies rising, yet still slightly behind PSA’s expectations.

Kimco Realty Corp (NYSE: KIM) On November 8, UBS analyst Michael Goldsmith kept a Buy rating on Kimco Realty and raised the price target from $25 to $30. Kim beat the estimates on FFO and revenue last week while raising its guidance from $1.60-$1.62 to $1.64-$1.65. The estimates were for $1.62. Goldsmith noted that store openings outnumber closings by a 2 to 1 margin and Kimco is in its best position ever.

Innovative Industrial Properties Inc (NYSE: IIPR) On November 8, Piper Sandler analyst Alexander Goldfarb maintained IIPR at Neutral and lowered the price target from $120 to $118. Goldfarb says the lack of SAFE banking helps the cannabis REIT industry by imposing financial restraints, despite the delay in re-scheduling cannabis from Schedule #I to #III thus far.

Tanger Inc (NYSE: SKT) On November 11, B of A analyst Jeffrey Spector upgraded Tanger from Neutral to Buy and raised the price target from $35 to $40. The analyst noted that Tanger’s leasing has exceeded its expectations for 2024 and it has a strong pipeline of retail store openings through 2026.   

American Homes 4 Rent Class A (NYSE: AMH) On November 11, Evercore ISI analyst Steve Sakwa upgraded American Homes 4 Rent from In Line to Outperform and nudged the price target from $41 to $42. Sakwa said that if mortgage rates stay elevated it will keep demand for single-family rentals high and slightly boost pricing power in 2025.

FIVE ZINGERS:

Splendid Lender: Claros Mortgage Trust (NYSE: CMTG) trounced the Q3 estimates, with Adjusted EPS of $0.22 besting $0.10 estimate and $64.877 million in revenue well ahead of the $67.180 million projection. CMTG soared higher on Friday by 6.68% but pulled back from $7.59 to $7.00 by Thursday.

Housing Deja Vu?: While the reasons are different, recent reports suggest today’s housing market has striking similarities to the market of 2007. such as high interest rates and an 87% pre-owned homes to 13% new homes ratio. But what’s stopping today’s market from crashing?

Renting? 50 Hours a Month Pays Your Tab: Self Financial Inc. reports that today’s workers often have to work 50 hours or about 30% of the total monthly work hours just to afford rising rents. In some states, such as Florida and California, the number of hours needed to work to pay the rent can be far greater.

30-Year Mortgage Soars After Election: The 30-year mortgage hit 7% the day after the election, before backing off. The average payment on a 30-year mortgage on a $400,000 home is now about $215 more than before September 11 when the Fed cut rates by 50 basis points. On Thursday, the average 30-year mortgage was 6.92% and the 10-year treasury yield was 4.41%.

Back To Work: On November 11, Park Hotels & Resorts Inc (NYSE: PK) announced that the strike of hotel workers at four of its hotels has ended, with the ratification of a labor agreement with the union. The strike had hurt Park’s Revenue per Available Room (RevPAR) and shares fell from $17.27 in April to a recent low of $13.59 before rebounding to $15.11 by Wednesday’s close. The dividend yield is now 6.62%.

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