PPS — Market News — The Closing Table

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Given the sometimes meaningful differences between the various multifamily REIT management team’s experience in and outlook for the major apartment markets, we are updating our “Talking Heads” apartment market commentary report for 2H16. This report aggregates the specific market commentary from the various management team’s 2Q16 earnings calls to give investors a more comprehensive outlook for 18 key markets, as well as the relative bullishness/bearishness of the various REIT management teams.

The slowdown in San Francisco rent growth proved to be persistent as EQR, struggling with occupancy and rent growth, reduced growth expectations for the second time. Interestingly, the outlook between higher-end operators such as EQR and owners of more moderately priced properties continues to diverge. The latter, such as AIV and ESS, observed solid rent growth and occupancy, and in the case of ESS, reduced lease-up concessions.
New York’s problems remain focused on Manhattan, which according to the REITs has not generated enough high-paying jobs to absorb the market’s high-end supply being delivered. Instead, with job growth coming primarily from mid-level jobs, the borough is left with a significant supply of high price-point units and weakening rent growth relative to the outer boroughs and suburbs. AVB, EQR, and UDR all seem to have differing views of 2017 supply on a submarket basis. We expect Manhattan rent growth to remain weak over the next 18 months.
Seattle remains surprisingly strong as forecasters had predicted 1H16 job growth would slow from the mid-4% range, which has yet to occur. With YTD 2016 job growth of 43,400 (vs 30,000 in 2015) exceeding expectations, Seattle has been able to easily absorb the new supply coming on-line (~3.5% of inventory). Despite expected deliveries of 7,000+ units in 2016 and another 7,000 units in 2017 (on the back of ~6,000 units in 2015), Seattle’s rental rate growth remains surprisingly strong (ranging from 5% to 9% in 2Q16).
The Houston market faces 24,000 units coming online this year, plus another 10,000-12,000 units in 2017. We expect the market to remain weak in 2017 given the continued losses in energy employment. However, gains in other sectors and potentially moderating supply could set Houston up for a recovery in 2018.
While LA does not appear to be a problem area, Downtown and Marina Del Rey continue to see pockets of weakness from new housing supply. Given various submarket exposures, we expect weaker results from AVB and UDR, while others, such as ESS and EQR, appear to be less affected in 2016. Despite LA’s increasing exposure to the technology industry in places such as Silicon Beach, no REIT has indicated any signs of the Silicon Valley weakness spreading here.
Positive rental growth and an improving outlook make the DC area an attractive destination. As the nation looks towards the impending election, we are naturally focused on DC-area job growth. One area to watch is the differential between Class A and B properties. EQR has seen parity in rental growth between the two, while others continue to see B’s outperform.
AIV is our favorite apartment name, given its continued combination of expected growth and attractive valuations. We also continue to like MAA over the next 12 months, but its acquisition of PPS may limit near-term price appreciation. Given EQR’s recent sell-off (and competitor downgrades), we believe the stock has the highest risk as well as the highest reward among the peers.