Profiting From Low Apartment Vacancies

By Matthew McCall | January 09, 2012 AAA

The housing market continues to be one of the black clouds that hang over the economy. However, not everything about real estate is in the doldrums. U.S. apartment vacancies fell to the lowest level in 10 years during the fourth quarter of 2011. The vacancy rate of 5.2% is better than the previous quarters' 5.6 and 6.6% one year ago. Even more promising is that as vacancies fell, the monthly effective rent increased by 2.3% from a year earlier. (For related reading, see How To Value A Real Estate Investment Property.)
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It appears the trend in apartment rentals will continue, as more families are not able to get loans for home purchases and others are forced out of their homes and into rentals. As investors we can look to real estate investment trusts (REITs) that specialize in owning and managing apartment communities. If the trend continues, they will be one of the winners.

The Players
Equity Residential (NYSE:EQR) is one of the largest REITs that focus on multifamily properties. The company has over 400 high-quality apartment communities in 16 states and the District of Colombia. The approximate $16.7 billion company was up around 10% over the past year and currently has a 4% dividend yield. The stock has been consolidating over the last few months and appears to be a buying opportunity in the low to mid-$50s.

UDR Inc. (NYSE:UDR) is in the middle-market apartment community sector with ownership in over 62,000 apartment homes. The approximate $5.4 billion company has around 3.4% dividend yield and was up about 9% this past year. Technically, the stock is not far from the 52-week high and appears to continually hit resistance at the $26 to $27 area. Entering a new position in the low $20s offers the best reward-to-risk setup, unless you wait for a breakout above the 2011 highs. (For more information, read The Anatomy Of Trading Breakouts.)

Essex Property Trust (NYSE:ESS) concentrates on the West Coast with 155 apartment communities mainly in California and Washington. The approximate $4.7 billion company has a dividend yield around 3% and had a strong year, gaining about 21%. The stock came close to hitting a new all-time high in November, before pulling back with the market. The number to watch is $150; if the stock closes above this level it will mark a new breakout and a buying opportunity.

Apartment Investment & Management (NYSE:AIV) is home to nearly 250,000 residents in 38 states, the District of Columbia and Puerto Rico. The approximate $2.8 billion company has a dividend yield around 2.1%, but struggled over the past year, falling by about 10%. The stock has been finding some support near the $20 area and AIV could be a "sleeper" when it comes to 2012. It appears many investors have given up on the company, but if the sector continues to trend higher it will likely bring AIV along for the ride.

The Bottom Line
The one issue that could hamper the trend of lower apartment vacancies and higher rents is the economy. If the economy struggles and unemployment inches back up it would cause the apartment REITs to rethink rent hikes and vacancies could increase. Keep an eye on the economy and look for the direct correlation. (To learn more, read How To Analyze Real Estate Investment Trusts.)

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At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.

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