High demand for apartments in the wake of the housing market crash and a dearth in the construction of new units has led the apartment REIT sector to outperform significantly in recent years. The National Association of Real Estate Investment Trusts reports apartment REIT price returns are up 225% through February 2012 since the REIT market’s trough in March 2009.
The surge in apartment REIT share prices has caused some investors to question whether apartment REIT stocks are fully valued. NAREIT claims there is an approximately 2.5-million unit supply-demand imbalance in apartment inventory–an imbalance likely to support strong financial performance by apartment REITs in 2012 and well beyond.
“The greatest imbalance I see in any sector currently between supply and demand is in multifamily tenant buildings," says Marty Cohen, co-chairman and co-CEO of REIT money manager Cohen & Steers. "If a person goes bankrupt or experiences a foreclosure, they can’t get a mortgage. We had 2.5 million people added to this category last year. Renting is the only proposition they have. Couple that with recent college graduates who see renting rather than owning as a better proposition in the current economy, and the reasons the sector is doing so well become clear.”
NAREIT’s analysis shows that construction of multifamily units plunged to a nearly 20-year low during the recession, creating a supply shortfall. According to the analysis, between 2008 and 2010, construction of multifamily units fell as much as 70 percent from its trend growth rate over the past decade.
Although multi-family construction starts have increased since the beginning of 2010, the number of units
According to NAREIT, the normal rate of household formation, as a result of population growth, adult children moving out of parents’ homes, divorce and other demographic events, is approximately 1.2 percent annually. Over the last four years, however, the annual rate of growth of household formation has fallen to approximately 0.5 percent, as people who otherwise would have moved into rental or single-family housing are continuing to live with parents, other family members, friends or roommates.
Some level of pent-up demand for new households normally forms during any economic recession. However, NAREIT’s review of 50 years of data indicates the current level of pent-up demand for new households is three times higher than it was at this point in the economic cycle in past recoveries. According to NAREIT, the current level of unmet demand represents approximately 2 million households.