Are Apartment REITs Ready to Bust?

Apartment REITs enjoyed a booming 2014, but according to this Wall Street Journal article they may be set for a bust:

But in the last month, investors and analysts have cooled to the sector. REIT total returns are a negative-1.7% so far in February, with apartments stocks returning a negative-1.1%. A handful of analysts have downgraded the apartment sector on fears it is overvalued and won’t generate the growth in revenue it posted last year.

“The problem is that the stocks are a bit more expensive, and you’re getting slower growth,” said Haendel St. Juste, a REIT analyst with Morgan Stanley. A year ago, Mr. St. Juste says, most REIT stocks were trading at a discount of between 10% and 15% of the value of their assets. After last year’s rally, most are now trading at a premium of 10% to 15%.

And there’s concern that too many units are being built:

Builders in the past six months have started construction on new multifamily apartments at an average pace of 357,000 units a year, 26% more than the 30-year average, according to Evercore ISI. The investment bank predicts negative demand, or a rise in vacancy rates, for apartments over the next year for Houston, Washington, Charlotte and Austin, Texas. “Overbuilding concerns will remain a focal point for REIT investors over the next few years given the current pace of permit activity and new starts,” says Steve Sakwa, an Evercore REIT analyst.

But not everyone is bearish on the apartment market:

Industry association NAREIT estimates that there is enough pent-up demand to fill roughly 3 million units, which is more than the development pipeline.

“People are living with parents, living with roommates,” said Calvin Schnure, NAREIT’s vice president for research. “It’s uncomfortable.”