Major Themes in 2nd Quarter Earnings Calls from Multifamily REITs
A review of 2nd quarter earnings calls for the larger multifamily REITs indicates that many of the positive factors realized during the first quarter of the year carried into the all-important peak leasing season across most national apartment markets.
Strong Apartment Demand
Continued strength in apartment demand despite ongoing macroeconomic uncertainty remained a key driver for 2nd quarter performance. Employment growth, wage growth, in-migration and housing affordability factors were frequently cited as significant demand drivers across varying regional and product class portfolios. AvalonBay Communities, Inc. (AVB) reported “operating momentum through the first half of the year has been driven by better-than-expected demand.” AVB also stated that sectors of the economy that encompass their core customer base are at effectively full employment with stable job and income prospects.
Camden Property Trust notes that across its primarily Sun Belt portfolio, “the main driver of apartment demand is household formation driven by population and employment growth, apartment affordability and positive demographic trends.” Meanwhile, Essex Property Trust, Inc. is seeing, “a gradual improvement in domestic migration patterns on the West Coast,” citing positive net domestic migration in Northern California for the first time since before the COVID-19 pandemic.
Housing affordability, particularly along the coastal regions, remained a strong apartment demand driver in 2nd quarter, as interest rates remained higher. Regarding its West Coast market strategy, Essex points out, “it is 2.8 times more expensive to own than to rent in our markets today, compared to 1.7 times back in 2019 when interest rates were near the historical low. Even if mortgage rates were to revert back to the 2019 level, homeownership in our markets will still remain significantly less affordable than renting.”
Occupancy Remains Solid
REIT operational occupancy performance remained solid during the first half of the year, despite historically elevated deliveries. In its 2024 Mid-Year Report, the National Association of Real Estate Investment Trusts (Nareit) notes, “high absolute and relative occupancy rates in the face of supply-demand imbalances showcase REITs’ prowess in asset selection and management.”
Equity Residential, for example, reached a strong 96.4% occupancy rate in 2nd quarter, “driven by good demand across our portfolio and a strong renewal process that resulted in low resident turnover.” Similarly, Mid-America Apartment Communities reported average physical occupancy of 95.5% across their Southeastern and Southwestern U.S. portfolio, which was up 20 basis points from the prior quarter, despite record completions.
Occupancy rates among coastal markets varied but were lifted on a blended basis by a handful of particularly strong performances. UDR reported, “New York, Boston, Washington, D.C. and Seattle, which collectively constitute 40% of our same-store pool or standouts, [averaged] higher than 97% occupancy during the quarter.” Likewise, Essex stated their East Coast markets are the best performers, “with occupancies around 97%.”
Managing Operating Costs
As elevated new supply levels and increased competition restrain operator pricing power in many markets, REITs continue to maintain a strong focus on the expense side of the income equation, both in terms of lower borrowing costs as well as streamlined operations. “Disciplined balance sheets are enabling REITs to enjoy greater operational flexibility and face less stress than their counterparts with higher debt loads and costs,” notes Nareit, which tracks REIT leverage and interest expense ratios.
Many REITs touched on internal initiatives to reduce operating expenses during their earnings calls, by optimizing technology systems, processes and staffing, with alignment carried into new property acquisition and portfolio management strategies. For example, Equity Residential asserts that when selecting new properties for purchase it plans to, “pod the acquired properties with our other nearby properties as we obtain scale in these markets and efficiently share employees across properties as we do in our coastal established markets.”
To that end, most REITs reported that transaction activity has been picking up in response to more optimistic market conditions alongside the fact that new construction starts are at historically low levels. Overall, the combination of strong apartment demand, generally positive forward-looking prospects, and a significant reprieve in the upcoming new supply pipeline resulted in multifamily REITs increasing forward guidance for the remainder of 2024 nearly across the board.
