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Multifamily REITs Pour Money into New Development

Multifamily REITs have continued to buy land and entitle new deals instead of paying top dollar for new acquisitions.

Multifamily REITs keep building new apartments, and the analysts who track the companies are getting worried.

“Both the volume and pace of new unit construction has been a concern in the multifamily space this year,” says Camilla Yanushevsky, senior analyst of real estate product operations for S&P Global Market Intelligence.

REITs in most sectors have capital to invest. But while office and retail REITs have largely stayed on the sidelines when it comes to new projects, multifamily REITs have continued to buy land and entitle new deals instead of paying top dollar for new acquisitions. That’s because REIT executives feel that even though apartment rents are growing more slowly than before, the core markets where they are building still have enough renters to fill up new units.

“The fundamental of the market are still really solid,” says Calvin Schnure, economist for the National Association of Real Estate Investment Trusts (NAREIT).

As of the second quarter of 2017, the REITs tracked by NAREIT had a development pipeline of $10.7 billion in apartment properties. “REITs have been developing apartments at about this pace for three or four years,” says Schnure.

They are continuing to start new apartment projects, even though the sector overall has begun to pull back as construction financing becomes more difficult to find. The number of new units likely to open in 2018 will decline to 271,842, from 389,723 in 2017, according to an August forecast from research firm Axiometrics, a RealPage company.

“The forces of supply are downward over the longer term, and may actually sync up with demand should Trump turn his attention to tax reform and infrastructure,” says Richard Anderson, a REIT analyst for Mizuho Bank.

REITs, unlike most multifamily developers, don’t have to rely on banks for construction financing. They can raise their own money on the stock market. The stock prices of REITs have been doing well so far this year, after a few years of lower returns.

“Their prices have been rising this year, which has made equity financing more attractive,” says Schnure.

Multifamily REITs had 91 properties under construction as of the end of August, according to S&P data—more than any other REIT sector except for industrial.

AvalonBay Communities is leading the charge, with 24 properties under construction, totaling 7,306 apartments, followed by Forest City Realty Trust, with seven projects totaling 2,360 apartments, Essex Property Trust has five projects in the works, totaling 1,968 apartments, and Camden Property Trust is working on six projects, totaling 1,873 apartments, according to S&P.

This is leading to some negative impact on the marketplace.

“The flood of new construction in 2017 is placing downward pressure on rents in some markets, specifically New York and San Francisco, which have been struggling with apartment rent growth,” says S&P’s Yanushevsky.

However, the REITs justify their current focus on development by pointing to the long-term demand for apartments.

“There are at least three to four million pent-up households living doubled up with roommates,” says Schnure. “Even as new supply comes along it is snapped up pretty quickly… What has surprised me is that we don’t have even more construction. REITs could probably build a lot more product and still find people to fill those apartments.”

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