Summary
- I like the potential of Class B apartments in areas where Class A has been bid up considerably.
- In the South, Class A property rents haven't climbed as much as in other parts of the U.S. and also benefits from strong population growth.
- The recent pullback in the stock is overdone and at a minimum; the stock should recover to its 1Q high - that's a 20% return.
Over the course of the last few months, I've been writing about my initial downgrade and subsequent upgrade of Apartment REITs. Last year, I forecasted that rental rates will flatten out and that increasing interest in home buying would be a major headwind for Apartment REITs going forward.
Even though rental rate growth slowed – temporarily – the increase in buying wasn't as strong as anticipated. We can blame that on higher mortgage rates, low inventory, slower new home building, and a number of other factors, but the result was a reacceleration of rental rates, particularly in Class A apartment buildings, and more specifically, in the Northeast and Western markets across all multi-family asset class types.
