Investors in commercial real estate have certainly had a lot to smile about over the last few years. Hit hard by the global credit crisis and resulting recession, prices for commercial real estate have bounced back aggressively. Funds like the SPDR Dow Jones REIT (ARCA:RWR) have seen their share prices rise as investors have sought protection in real assets and solid dividend payers. Perhaps benefiting the most have been those real estate investors in the apartment sector. As the U.S. housing crisis has thrown the market for single-family homes in a loop, those in the multi-family sector have seen their star shine. While there are some signs that housing may have bottomed, there are still plenty of reasons to be bullish on the apartment REIT sector.
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Plenty of Long-Term Momentum
Since the depths of the mortgage crisis, apartment REIT shares have soared nearly 255%. The economic downturn forced millions of families from single family homes into rental units. That mass exodus has helped drive up rental rates and ultimately, the bottom lines for firms operating in the sector. However, despite the group's recent outperformance, there is still an abundance of reasons to be bullish on multi-family medium to long-term prospects.
According to industry group, the National Association of Real Estate Investment Trusts (NAREIT) there is approximately 3 million American households that have "doubled-up" since 2008. As the job market has improved, NAREIT believes that many of these families will begin to look for their own places to live. At the same time, the current level of pent-up demand for new households is nearly three times higher than it has been at this point in the economic cycle of past recoveries.
Yet the group's data is currently showing a shortage of 2.5 million rental units. While multi-family construction activity has picked up over the last year, it is still is far below pre-crisis highs. As the lack of available capital continues to hit the real estate sector, construction of apartment units fell nearly 70% from their historical growth rate between 2008 and 2010. More than 60% of the apartments units that were started in 2010 are still currently under construction.
Add this to the fact that bruised credit reports due to foreclosures and short sales, will keep many former homeowners renters for quite some time, and you have a recipe for higher occupancy rates and rents for a long time.
SEE: Add Some Real Estate To Your Portfolio
Playing the Continued Trend
With the trend firmly in place for the apartment subsector to continue with its outperformance, investors may still want to consider overweighting it in a real estate portfolio. The iShares FTSE NAREIT Residential ETF (ARCA:REZ) tracks 34 different housing REITS including Avalonbay Communities (NYSE:AVB) and UDR (NYSE:UDR) and can be used as a broad play on the theme. The ETF yields a market-beating 3.16% and expenses run a cheap 0.48%. However, there are plenty of other ways to potentially get some better returns and yield out of the sector.
Operating almost 49,000 apartment units across the Sunbelt of the U.S. (where foreclosure activity remains high), Mid-America Apartment Communities (NYSE:MAA) could be a great bet. The property owner continues to expand into key high growth areas and has plans to spend more than $500 million on acquisitions this year. At the same time, MAA recently reported over a 25% jump in funds from operations (FFO) as it has seen an increase in its rental rates. Shares of the REIT currently yield a healthy 3.8%.
Also benefiting from acquisitions and development, Camden Property Trust (NYSE:CPT) recently saw its FFO increase by 15% for the first quarter. The apartment REIT owns and operates around 70,000 units across markets in Florida, Texas and Washington, D.C, and has been able to command higher rental rates for properties. Those higher rents have translated into a 24% increase in the REIT's dividend over the last two years. Shares of Camden currently yield 3.3%.
SEE: How To Assess A Real Estate Investment Trust (REIT)
The Bottom Line
While commercial real estate overall has bounced back from its lows, demographic trends are still pointing in the favor of multi-family housings. As renting continues to become a necessity for many families, REITs that focus on apartments will be winners. Firms like Essex Property Trust (NYSE:ESS) and BRE Properties (NYSE:BRE) as well as the proceeding picks, make excellent additions to a portfolio to play the trend.
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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.