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Apartment Market Continues to Moderate, No Near-Term Respite

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If stellar job growth in recent months indicates more household formations and raises expectations for a robust revival of the apartment market fundamentals, then we should, perhaps, think twice.

This is because per the latest report from the real estate technology and analytics firm RealPage, Inc. (RP - Free Report) , with several markets experiencing flat rents, U.S. apartment rents have increased at an annual pace of just 2.3% as of mid-2018 — marking the slowest pace in eight years. While a mid-2018 occupancy level of 95.0% is still healthy, the deceleration in rent growth suggests that a competitive leasing environment is building up fast, and curbing landlords’ pricing power.

While there was a moderation in the first quarter too, but the January-March quarter usually has a sluggish leasing period due to the cold weather that inhibits shift of households and limits growth in demand. Therefore, achieving a solid pricing power in the second quarter is significant, as otherwise, landlords find it difficult to recoup the same later in the year. This is because prior to the onset of the seasonal slowdown in leasing, pressure of filling units is more prevalent in the market than pushing rent levels north.

However, during Q2 this year, the market recorded a pricing increase of 1.8%. In fact, rent growth was slower than the pace experienced during the same period in the earlier years. In the 2014-2017 period, rent growth in the April-June quarter averaged 2.3%.

Furthermore, this turbulent environment is unlikely to end any time soon and offer respite, as the struggle to lure renters will definitely continue into the upcoming quarters as well, when much of new supply is expected to come on course.

According to the RealPage report, the “annual pace of completions” climbed above the 300,000-unit level for four consecutive quarters. Additionally, through mid-2019, annual deliveries will keep adding on to the flow with around 300,000 units.

Therefore, landlords’ ability to command more rents will most likely remain stunted and concessions might be rampant in the near term. This, again, is feared to cast a pall on residential REIT stocks like Apartment Investment & Management Co. (AIV - Free Report) , better known as Aimco, American Homes 4 Rent (AMH - Free Report) , AvalonBay Communities, Inc. (AVB - Free Report) and Equity Residential (EQR - Free Report) .

While AvalonBay and Equity Residential currently have a Zacks Rank #3 (Hold), Aimco and American Homes 4 Rent carry a Zacks Rank of 4 (Sell), underlining downward revisions of the 2018 funds from operations (FFO) per share estimate in recent months.

(You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.)

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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