It Might Be Time To Bail On This Once Promising Apartment REIT

The real estate investment trust Equity Residential EQR is one of the most popular apartment REITs and one that analysts have been giving favorable ratings to so far this year. The company owns or has investments in 311 properties consisting of 80,581 apartment units.

Considering that multifamily real estate is one of the most resilient asset classes, especially as homeownership is becoming increasingly unaffordable, it’s no surprise that analysts have had a positive outlook on this REIT.

However, an analyst at Piper Sandler has a different view and just downgraded Equity Residential to Underweight and lowered the REIT’s price target to $70.

While multifamily real estate is a strong asset class, not all apartment portfolios are created equally. The potential problems for Equity Residential lie in the markets where the company’s apartment assets are located.

The REIT has a strong presence in markets like Boston, New York City, Washington, D.C., Seattle, San Francisco and Southern California. These are markets where rents have increased beyond a sustainable level and without the population growth to support demand.

Investors are likely to find greater upside in markets with strong population growth and job growth, where demand for rental units is expected to continue growing and allow for further rent growth over the next several years.

The same Piper Sandler analyst maintained an Overweight rating for Mid-America Apartment Communities Inc MAA. This REIT has a portfolio that’s primarily focused across the high-growth Sunbelt region of the U.S., where demand is expected to support further income growth.

The greatest growth opportunities in the multifamily space appear to be in development projects. Rent growth and appreciation both outpaced the increase in construction costs in 2021, which are up 17.5%, the highest in 50 years. This gives developers the ability to construct a superior product in the market while being able to offer competitive rental rates.

One nationally renowned developer currently has three projects in its pipeline, in markets with growing demand, that are expected to provide a significantly higher cap rate than what could be obtained by purchasing an inferior property. Projects like this can result in higher cash flow and greater upside for investors.

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