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We Don't Feel at Home With Apartment REITs' Bullish Outlook

CEOs tout current tailwinds, but we're wary of long-term benefits.

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We recently had the opportunity to hear a panel of multifamily REIT CEOs--Camden Property's Richard Campo, Equity Residential's (EQR) David Neithercut, UDR Inc.'s (UDR) Tom Toomey, and Essex Property's Michael Schall--speak candidly about sector fundamentals. While we agree with these CEOs that near-term fundamentals are robust, our opinions differed on other matters. For instance, we disagree with the assertion that the millennial cohort is meaningfully different than others before it. The panel discussion did not lead us to change our moat assessments or fair value estimates for the apartment market, and we continue to think that recent acquisition pricing offers no margin of safety. While there is upside to our current fair value estimates for apartment REITs if present supply and demand tailwinds persist beyond the near term, or if boomers turn toward apartment renting en masse, we continue to think the benefits will ultimately prove ephemeral.

Tailwinds, but for How Long?
Much of the panel discussion centered on the presently attractive supply and demand drivers of the apartment space. For instance, on the supply side, single-family housing construction boomed during the last decade, while multifamily construction stalled. Because banks were badly burned by construction loans, they are not robustly building out construction books at this juncture. Also, most of the single-family overhang from the last decade isn't competitive with multifamily portfolios in structurally dense urban cores.

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Jason Ren does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.