Tight U.S. Housing Market Sees A Steady Rise For North American Apartment REITs

Realty experts and investors are unsure how the U.S. housing market will fare in the second half of the year, as tight interest rates keep homeowners from listing their properties, and rising property values have mostly priced out would-be buyers. 

Many experts across the market have started sounding alarm bells that the U.S. housing market has bottomed out and has now entered recessionary territory. The market for existing homes remained stable throughout the first six months of the year, however, new home sales fell deeper in April, reaching levels last witnessed during the 1970s. 

Current estimates by the National Association of Realtors show that existing home sales for April 2024 reached 4.14 million closely reaching the 4.09 existing home sales recorded in April 1978. Elsewhere, Goldman Sachs analysts have released a similar projection, outlining that existing home sales will likely drift beyond 4.1 million in 2024 to around 4.5 million by 2027. 

All of these estimates are far below the 6.1 million existing home sales recorded during the peak of the pandemic housing bubble back in 2021. Should interest rates eventually begin falling, forward-looking projections are likely to remain below the 5.3 million sales recorded in pre-pandemic times. 

Slower demand and higher inventory levels have done little to put a pause on rising prices. Across several housing markets, home prices have remained historically high, despite seeing a decline in buyer interest. In markets in the Northeast and Midwest, inventory levels have remained tight, further pricing out would-be buyers. 

As talks begin to echo across the market of a potential rate cut in the coming months, following a move by the Bank of Canada, the country’s central bank, to slash its prime interest rate by 0.25% on June 5 - being the first G-7 nation to start loosening its monetary policy - the U.S. Federal Reserve has given minimal indication when it’s planning on following a similar trajectory. 

Apartment REITs Are Picking Up Steam 

Even after the decision by Canada’s central bank to start cutting interest rates, and with the U.S. housing market rapidly losing steam, would-be buyers are taking up a new position in the rental market instead. 

With higher prices, soaring demand in some regional property markets, exuberant interest rates, and homeowners locking in their properties instead of listing their homes and having to take up a higher interest rate, demand for apartment real estate investment trusts (REITs) is beginning to indicate more positive performance despite several markets seeing a slight rise in rental prices during the first several months of the year. 

Last year witnessed the highest number of new apartments under construction since 1973, according to the National Association of Homebuilders. Higher inventory levels against the backdrop of steady demand have meant that rent prices have started to stabilize in some major metropolitan areas. 

Experts predict that current inventory levels will see a significant boost, with an estimated 900,000 new units under construction, on top of 440,000 new units expected to be completed in 2024. 

In some parts of the U.S., such as Chicago, Las Vegas, and Washington D.C. project completion has already peaked, with more on the books for Austin, Dallas, and Nashville, according to a report by the commercial property firm CBRE. 

Overall, the median U.S. asking rent had declined in April on an annual basis, making this the ninth month in a row that rents had been seen falling. On average, the median asking rent is now standing at $1,723 per month, according to an April report released by Realtor.com. Though prices are coming down, even slightly, they remain only 1.9% below the peak of 2022.

Now experts predict rental prices to stabilize further this year, with rents expected to grow 1.2% in some areas, investors might be locking in with REITs instead, holding on to their current position as the housing market dives deeper into a recession.

Five North American REITs To Keep On Your Watch List 

With numerous factors influencing the property market, both in the U.S. and Canada, investors might be steadily seeking to balance their portfolios with REIT options that may present them with better near-term returns, despite widespread uncertainty. 

Although the rental market isn't completely unscathed from wider volatility, a correlation between high prices and red-hot mortgage rates could instead push many would-be buyers to either hold on to their current property, before listing or send many into the rental market instead, creating further opportunities down the road for investors taking advantage of current conditions. 

Boardwalk Real Estate Investment Trust

Boardwalk (OTCMKTS: BOWFF) is a Calgary, Canada-based property management company with more than 33,564 rental units located in Alberta, Quebec, Saskatchewan, Ontario, and British Columbia as of May 2024. The company operates three independent brands, namely, Lifestyle, Communities, and Living, which comprise residential and mixed-residential rental units. 

The company recently announced its first-quarter financial results and reported strong earnings growth across most of its portfolio. Overall, Boardwalk witnessed better-than-expected financial performance, booking $307.7 million in profit, and seeing an increase of 20.3% in Funds From Operations (FFO) of $0.95 per unit from Q1 2023. 

Total same property operating income came up by 13.5% rising to $87.2 million compared to the same period last year. Overall, the same property revenue growth held steady, with rental revenue increasing 1.8%, and the occupied rent of $1,418 in March 2024 was $30 higher compared to December 2023. Even after the increase, average occupied rent remains well below the national average of $$1,915 in April, which increased an eye-watering 11.6% year over year. 

Total occupancy held steady, increasing 72 basis points from Q1 2023, ending the first quarter at 98.8%, only 0.2% below the peak of 99% reported at the turn of the year. 

Based on current consensus, Boardwalk currently sits with a “Moderate Buy” position after share performance has declined by 3.59% year to date (YTD), and coming down nearly 15% since its peak in March. Despite the slower-than-usual share performance, Boardwalk holds a strong position with a diverse portfolio of rental units offered at low and attractive asking rents. 

Canadian Apartment Properties Real Estate Investment Trust 

Canadian Apartment Properties (OTCMKTS: CDPYF) is considered to be one of the largest residential property REITs in the country, with more than 64,200 residential units located across Canada and the Netherlands. For Q1 2024, Canadian Apartment Properties reported 45,151 units located in Canada, with Toronto, Ontario holding the largest portfolio share of 17,139 units. 

Toronto, along with Vancouver and Montreal have been among the most active residential markets in Canada as demand continues to remain historically high due to rapid population growth across most parts of the country. The population of Toronto 2024 is projected to be nearly 2.6 million residents, with a projected 3 million residents living in the Greater Toronto Area by the end of 2025. 

Based on Q1 2024, Canadian Apartment Properties reported a strong quarter, with steady growth across most of its segments. For starters, the total monthly asking rent averaged $1,552 per, below the national recorded average of April 2024. 

Financial performance held steady, with CAPREIT holding more than $369.3 million in liquidity and a total of $143.2 million in total mortgage financing with an average maturity of 8.7 years and an interest rate of 4.64%. 

Elsewhere, the company has reported a healthy quarter with a 98% occupancy rate. Current portfolio distribution sees sites in Ontario, Quebec, and British Columbia having the highest number of occupied units, as of March 31, 2024. In total, roughly 15% of properties in their portfolio are currently located in the Netherlands. 

Over on the stock market, CAPREIT performance has been sluggish, seeing an overall share decline of nearly 13% since the turn of the year. During the last month, the company had seen share prices slide by more than 6%, and has come down by 15.59% since its peak at the end of February. 

Though conditions on the stock market have been everything but pleasant, experts are predicting CAPREIT to have a “Moderate Buy” rating, seeing as share prices are below their former peak, and the stock is trading at a 2.9% yield, which trades as a forward-looking price to funds from operations. 

Essex Property Trust Real Estate Investment Trust

Essex Property (NYSE: ESS) is a California-based real estate investment trust, and as of December 2023, the company had operations in more than 252 apartment complexes, holding a combined 61,997 apartment units, including an additional three commercial office buildings which totaled more than 283,000 square feet of rentable space. 

Essex is well-known as one of only a handful of REIT Dividend Aristocrats, having increased its dividends for 20 consecutive years. ESS currently holds a 3.64% dividend yield, and as of Q1 2024 pays roughly $2.45 per share with a payout ratio of 57.64.

Apart from this, the company currently has several development projects located along the coast of Southern and Northern California, with operations in the San Francisco Bay Area, Los Angeles, and communities located in Seattle, Washington. 

The first quarter was somewhat of a mixed bag of results, with the company reporting steady performance growth across some of its business segments. For starters, same-property revenues and net operating income grew by 3.6% and 3.0%, respectively, compared to the same period last year. 

Q1 2024 revenue for the Northern California region improved by 3.1%, while Southern California regional revenue increased by 4.6%, and Seattle metro revenue was up 2.5%. In total, same-property revenue was up 0.6% compared to Q1 2023. 

Elsewhere, the company acquired a majority stake in a venture partner deal, with 49.9% interest in four apartment communities, totaling more than $505 million on a gross basis, with an expected acquisition yield of 5.9%. 

On the stock market, ESS remains somewhat above its former peak, trading 6.55% higher since the turn of the year, and now has a trading position of 0.01% below its May peak when share prices were hovering near $267.84 per share. On top of this, ESS is up by more than 14% over the last 12 months, with share prices remaining above the $260 trend line. 

Centerspace Real Estate Investment Trust

Centerspace (NYSE: CSR) is a residential property management company that operates rental property units in the Midwest, with operations in Minnesota, Monta, Nebraska, North Dakota South Dakota, and Colorado. 

Since its founding in 1970, Centerspace has positioned itself as a community-centered company, owning roughly 70 apartment communities, consisting of more than 12,883 units across the Midwest and Mountain West Region.

As part of their business model, Centerspace now manages the acquisition of various apartment communities, including the redevelopment and development of communities across multiple cities. As of March 31, 2024, Centerspace had an occupancy rate of 94.6%.

In March of this year, President and CEO Anne Olson marked her one-year anniversary as chief executive of the company, and since her inception, performance indicators have steadily been growing with most recent quarterly results showing an improvement of 3.5% in same-unit revenues compared to Q1 2023. 

Additionally, same-unit expenses were a little unchanged, rising 2.2% compared to the same period last year, and net operating income was up by 7.5% from Q1 2023. 

During the first three months of the year, Centerspace finalized the successful sale of two non-core apartment communities in the Minnesota region, totaling roughly $19 million. This sale forms part of the company’s long-form outlook, and following the successful first quarter, Centerspace has managed to raise its forward-looking guidance for the remainder of the year. 

On the stock market, share performance has managed to outpace the majority of nearest competitors seeing a nearly 17% jump in share price since the start of the year. This performance is in line with the last 12 months, which has seen share prices gain nearly 8% on the stock market. 

Though there’s not much to be excited about Centerspace, the company looks to promise stability and much-needed consistency for investors in an already volatile market. 

NexPoint Residential Real Estate Investment Trust

Last on the list is NexPoint (NYSE: NXRT), a residential real estate trust that provides investors with a value-added and component-driven strategic approach through the acquisition and redevelopment of residential apartments to improve rental rates and offer high-quality services. 

The company’s investment strategy is centered around various components such as purchasing and operating rental units in high-density neighborhoods that provide tenants with maximum employment opportunities, nearby parks, schools, and other combined public amenities. 

Unlike other companies on this list, NexPoint holds a majority in the investment side, while having entered an agreement with BH Management Services for all major property-related management needs. BH Management currently owns and operates nearly 60,000 multifamily units across the United States. 

For the first quarter, NexPoint reported a decline in revenue, booking $67.62 million which aggregated to roughly 2.33% lower compared to Q4 2023. However, net income managed to see positive improvements, rising 777.26% and ending the quarter at $26.30 million. 

Across its portfolio, the company held more than 37 properties consisting of nearly 13,376 units. Effective monthly asking rent per unit across all properties ended the quarter at $1,511, while physical occupancy was 94.6%.

Similarly, share performance has been positive, to say the least. Year-to-date prices have managed to climb by nearly 8%, despite the 12-month performance being down by roughly 17%. 

NexPoint had endured troubling waters in recent months, however, the company is starting to come back on top, despite seeing share prices hitting a two-year low of $26.84 in October last year. NXRT is currently 38.49% up from its previous low, however, prices are still about 24% below its former peak recorded in July 2023. 

Looking Forward 

Though the property market remains historically volatile, uncertain conditions, higher prices, and stubborn interest rates have meant that more would-be buyers are being priced out, and newcomers are turning to short and long-term rentals instead. 

For investors, this creates a new avenue of opportunity, as individual apartment and multifamily rental unit inventory steadily climbs against a backdrop of slower demand and stabilizing rental prices. 

While many are holding out for near-term rate cuts, even the slightest decrease in mortgage rates could do little to lift current sentiment. Property prices are expected to remain historically elevated, however, this shouldn’t discourage investors looking to leverage the rental market instead for more stability and overall consistency.