Apartment Rents Level Despite Healthy Demand & Supply Surge

The U.S. apartment rental market is currently experiencing a seismic shift. For the first time in decades, the growth in apartment rents is leveling rapidly, and there’s even the possibility of negative growth on the horizon, per a recent RealPage report.

What is intriguing is that this development is taking place at a time when demand is healthy and jobs are continued to be produced by the economy. The culprit seems to be the unprecedented surge in apartment construction, which is reshaping the dynamics of the rental market and tilting the balance of power toward renters.

In August, on a year-over-year basis, same-store effective asking rents for new leases increased by a mere 0.28%, and this figure is poised to potentially slip into negative territory by September. Interestingly, while rent growth takes a breather, the demand for rental properties remains healthy, with occupancy rates stabilizing in the mid-94% range since January, aligning closely with long-term norms.

This is happening because, with the influx of new supply into the market, renters have a plethora of choices, resulting in increased tenant turnover. However, to stay competitive and maintain occupancy rates and cash flow, property operators are giving up on prices.

AvalonBay Communities AVB serves as a prime example of a company navigating this changing landscape successfully. Per its recent operating update, this residential REIT reported a 5.3% increase in same-store residential rental revenues for the two months ended Aug 31, 2023 compared with the prior-year period. This is roughly 40 basis points higher than the company’s most recent expectation on Jul 31, 2023. This demonstrates its adaptability in the face of market shifts.

Physical occupancy for its same-store residential communities of 95.6% in August increased from 95.2% in the prior month. AvalonBay had recorded physical occupancy of 95.5% in the second quarter. However, the like-term effective rent change for same-store residential communities dropped to 3% in August from 3.9% in July. The figure also marked a decline from 4.9% in the second quarter.

Equity Residential EQR, another prominent player in the industry, also seems to have weathered the changes with poise. The REIT concluded the leasing season with healthy demand and pricing for its apartment units. Also, the company said that its same-store revenue growth is on track with the guidance it issued during the second-quarter earnings release.

Consistent with seasonal trends, rents peaked in early August, and the company anticipates rent moderation for the remainder of the year. Despite a 3.5% increase in same-store residential blended rates for the third quarter through Aug 31 compared to a 4.3% increase in the second quarter EQR reported an uptick in physical occupancy. Same-store physical occupancy increased to 96% in the same period from 95.9% in the prior quarter.

What Lies Ahead?

Supply volumes are expected to remain elevated through 2024, and this is likely to put pressure on rents. However, residential REITs with well-positioned properties in strategic markets are expected to navigate through this environment efficiently, with demand remaining healthy. Moreover, amid financing issues and other challenges, new construction starts have tapered off in 2023. This suggests a significant reduction in supply by the latter half of 2025 and into 2026.

In the short term, as supply remains elevated, renters may find themselves in a favorable position. However, market dynamics can change rapidly, and investors should keep a close eye on the evolving landscape to make informed decisions in this shifting market.

Currently, AvalonBay and Equity Residential each carry a Zacks Rank of 3 (Hold).
AvalonBay Communities, Inc. (AVB): Free Stock Analysis Report

Equity Residential (EQR): Free Stock Analysis Report

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