Historic numbers of new rental apartments opening over the next 18 months are poised to decrease profits for the largest publicly traded landlords, who are already contending with slower or declining rent growth.
Nationally, more than 950,000 multifamily units are under construction , according to the U.S. Census Bureau. That equals three times the number for apartment construction from two decades ago.
Sunbelt cities are the most exposed to the recent ramp-up in new supply, according to a May report from real estate analytics firm Green Street.
in Atlanta , rents are already flattening out. Now apartment owners have to contend with the wave of new construction that will follow a record in building permits last year. Green Street predicts Atlanta occupancy rates will also decline.
Camden Property Trust and Mid-America Apartment Communities are among publicly traded landlords with the largest holdings in the South and Southwest, where new supply is booming.
Both firms beat consensus revenue expectations in the first quarter. But many investors are looking toward the year ahead, when new leases get signed at much lower rent increases and competition from new buildings becomes more of a factor.
On April earnings calls, both companies conceded that they faced pressure from the crush of new units but also said that any negative effect would be short-lived. Permitting for future apartment developments is expected to cool off soon, they said, as higher interest rates make financing too expensive for many builders. Shares in Camden and Mid-America initially rose after late April earnings reports, but they are down since then. Both stocks have fallen about 3% since the start of the year.
Overall, the FTSE Nareit Equity Apartments index, which tracks the performance of publicly traded multifamily owners, is up about 5% year to date. That compares with a 12% gain for the S&P 500. Pent-up demand for housing exploded in the months after the introduction of Covid-19 vaccines in late 2020, and a surge in the number of people searching for apartments lifted rents 25% over two years. That rapid growth pace has disappeared. The average asking rent for a market-rate apartment was $1,716 this May, a 2.6% increase from the same month a year before, according to data provider Yardi Matrix. That compares with the 15% annual increase seen in the first quarter of 2022, Yardi said.
Multifamily-building values fell 12% below their year-earlier levels this April, according to data provider MSCI Real Assets.
The recent softness shows that many tenants have a limit for how much they can pay in rent, while others might be spending less for fear of a slowing economy and the prospect of more job losses.
Rents are now falling in some Sunbelt cities with housing markets that boomed during the pandemic, including Phoenix and Las Vegas, according to Apartment List, a rentals website. In addition to new apartment supply, slowing job growth in these and other cities would also portend lagging rents in the near future, analysts said.
Still, publicly traded apartment owners are expected to report larger profit growth than some other property sectors this year, according to reports from both UBS and Green Street. This is in part because many renters have leases that they signed last year, when rents were still rising at an above-average pace.
Landlords are also sailing with tailwinds from a for-sale housing market that remains unaffordable to many of their customers. Equity Residential, for example, reported that the share of tenants who left their buildings to buy a home fell to 8% in the first quarter of 2023, compared with 12% during the same quarter a year ago. Other companies report similar trends, analysts said.
"Monthly costs and down-payment requirements remain high in our markets, especially relative to rents," said Equity Residential Chief Executive Mark Parrell during an April earnings call.