Photo: Kirsten Jennings
Earlier we mentioned how BofA/ML’s Michelle Meyer laid out three big reasons why the shift from home ownership to renting would continue for a while.In a companion note, analyst Jeffrey Spector explained how to profit from this trend, which basically boils down to: buy apartment REITs.
We recommend this barbell investment approach. On one end, AVB (Avalon Bay), who traditionally targets higher-income renters with its coastal in-fill portfolio, should benefit by adding new supply in low vacancy markets. On the other end, AIV (Apartment and Investment Management Co.) and CLP (Colonial Properties Trust), who tend to offer lower average rents than other REITs in the majority of their markets, should see an even greater increase in demand from new renters that previously owned homes as well as from current renters that choose to trade down.
Surprisingly, despite the “glut” elsewhere, the apartment rental area is tight:
Select REITs have restarted their development pipelines, but on the whole, new multi-family construction remains limited. Private developers continue to have difficulty obtaining construction loans, and we have heard some lenders are requiring recourse debt and 30% equity. Developers are eager to start building, but regional banks continue to be hesitant, as they still have CRE loans that need to be written down. Housing starts and building permits for multifamily properties have gone up slightly but are well below historical activity. Our Economics team expects multi-family starts will pick up in 2H11. However, the 12-14 month construction lag puts additional upward pressure on rents. The increase in rents will further encourage construction by enticing developers and investors.
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