Multifamily REITs Now King of the Hill

Charlottsville, Va.--In a new report, SNL Real Estate notes that during the first half of 2010, multifamily REITs outperformed every other kind of REIT in various ways, but perhaps most importantly, in returns to investors.

Dees Stribling, Contributing Editor

Charlottsville, Va.–In a new report, SNL Real Estate notes that during the first half of 2010, multifamily REITs outperformed every other kind of REIT in various ways, but perhaps most importantly, in returns to investors. The property type has been having a good run so far this year, and so have the REITs that have specialized in it.

Stronger demand for apartments has driven occupancy, and in the case of REIT portfolios, that has been true since the beginning of the recession. “Occupancy has been on the rise for multifamily REITs since the first quarter of 2008, moving from 93.5 percent at that quarter’s end to 94.9 percent at the end of the 2010 first quarter,” says the report, which was written by Chris Henderson, an analyst at SNL. “REITs as a whole, however, have seen a rather significant drop in occupancy; the metric fell to 86.2 percent at the end of the first quarter from 89.2 percent two years before,” says Henderson.

Another advantage for the multifamily REIT sector is the relative strength of its capital supply, courtesy Fannie Mae and Freddie Mac. The rest of the REIT universe doesn’t enjoy that kind of robust liquidity.

SNL reports that multifamily REITs have produced greater returns for their investors than the broader REIT universe has thus far in 2010. Year-to-date, the SNL US REIT Multifamily Index posted a return of 33.5 percent as of Aug. 2, 2010. The return for the SNL US REIT Equity Index, by comparison, was 19.7 percent during the same period.

Still, the report warned that things could change for multifamily REITs because of factors beyond their control in the for-sale residential sector. “While multifamily REITs have benefitted from an economic environment that has discouraged tenants from moving out, multifamily REITs must also be wary of a decrease in the gap of costs related to renting versus buying,” it says.

With continued decreases in home pricing, many tenants that were previously against taking on the cost of homeownership may be willing to take that plunge going forward, the report continues. “This could have a negative effect on multifamily REITs by either reducing occupancy as tenants acquire homes at discounted pricing, or by forcing the REITs to reduce rents further to maintain current occupancy levels,” it cautioned.