Apartment REITs see silver lining as high mortgage rates force tenants to stay put

By Ananta Agarwal

(Reuters) - Real estate investment trusts (REITs) that own and manage apartments are expected to see a bump in their revenue from a rise in renewed leases and rental deals as fewer Americans chase their dreams of buying a new home due to higher borrowing costs. That may come as a relief to the sector, which has struggled with lower rates for fresh leases this year as a supply glut following the pandemic has driven down rents while increasing the cost of attracting fresh tenants. REITs have been able to charge 3-5% higher rates for tenants looking to renew their leases and that figure has remained steady for a while. Contrast that with a less than 1% hike in new lease rates, which in some markets have also turned negative, given the competition to boost the occupancy rate. "Enticing people to take a vacant unit can be a relatively expensive proposition, particularly during uncertain times," Wedbush Securities analyst Richard Anderson said, adding this could prompt them to cut rents or offer concessions for new tenants if turnover remained high.

However, with home ownership becoming unaffordable for most Americans because of rising mortgage rates, turnover rates have slowed at most big REITs.

The pace of average overall turnover rate slowed to 48.8% in the third quarter from a typical 52.5% for the top seven REITs, including AvalonBay Communities and Mid America Apartments, BMO Capital Markets' John Kim said.

REITs in the United States derive their income by renting out properties that they buy and manage while distributing the bulk of their taxable profit as dividends to shareholders, making them an attractive investment option for people seeking steady returns. However, they have lost some of their allure after year-on-year rent growth in the United States started falling from a double-digit rate by mid-2022 due to increased supply from a cheap-debt-fuelled boom in construction of multifamily apartments for rent or lease in the last two years.

The S&P 500 Equity Real Estate Investment Trusts Sub Index is up just 2.03% this year, compared with an 18.95% gain in the broader S&P 500 index.

Major REITs have also seen their shares suffer in 2023, with Mid America Apartments shedding 19% while Equity Residential gained a meagre 1.24%. Still, rising home prices are starting to turn the tide in their favor. The average mortgage payment was 52% higher than the average cost-to-rent each month in the third quarter, according to real-estate intelligence provider CBRE Group.

The number of people moving out specifically to buy a home - usually 15% of the total - has dropped to well below 10% for most of the biggest multi-family REITs, Wedbush's Anderson said.

Backing Anderson's view, Camden Property Trust CEO Richard Campo said, "The percentage of Camden residents moving out to purchase a home is currently at one of the lowest levels we have seen in our 30-year operating history." With REITs experiencing a snapback from an era of high rent growth, more renewals also save on costs, especially with turnover expenses having more than doubled since March 2020, according to data analytics firm RealPage. "You also see a revenue benefit from not having the unit vacant for some period of time between residents," Janney Montgomery Scott analyst Robert Stevenson said. "So they have a vested interest in keeping existing residents."

(Reporting by Ananta Agarwal in Bengaluru; editing by Arpan Varghese and Anil D'Silva)