Home Featured Multifamily REIT Review: Apartment Permit Analysis Suggests Persisting Supply Pressure

Multifamily REIT Review: Apartment Permit Analysis Suggests Persisting Supply Pressure


According to a recently report from Canaccord Genuity Inc. on multifamily REITs, while many investors have expected deliveries to taper moving into 2H17, the company believes the sector is not in the clear just yet. In fact, after dissecting each REIT portfolio on an MSA-by-MSA basis, the company believes that both the apartment industry and nearly all of the REITs should expect supply growth to actually accelerate further over the next 12 months.

“While economic acceleration and thus job growth would be a positive across the group and help absorb this new supply, we believe it is also more unpredictable in the current environment. Rather, we believe our supply growth analysis driven by building permit authorization is a more predictable and therefore useful metric to forecasting fundamentals given that a large degree of authorizations result in successful deliveries. Using the Census Bureau’s building permit data, we have formulated a model to calculate each REIT’s exposure to new supply and generate the following conclusions,” say analysts Michael Kodesch and Ryan Meliker.

In their report, they say that estimated TTM new deliveries (5 units or more) over existing housing units (5 units or more), or TTM supply growth, was 1.50% across the US. Estimated NTM supply growth is expected to be 1.78%, or about 27 bps of acceleration from the prior 12 months, they say.

“While NXRT’s portfolio is exposed to the most supply growth acceleration on this basis at +35 bps, we note that much of this new supply is likely coming in at a higher price point and is therefore less competitive.”

The report also notes that “generally, suburban-oriented portfolios (IRT, BRG, MAA, APTS, NXRT, and to a lesser degree CPT) are seeing less supply acceleration than urban-oriented portfolios (AVB, EQR, UDR, AIV, MORE, ESS and to a lesser degree AIV).”

Putting all of this together, the report says that “investors should continue to temper fundamental expectations over the next 12 months as we expect supply deliveries to continue to weigh on new and renewal lease growth. In addition to the building permit analysis, we think other factors such as delivery delays, anecdotal evidence pointing to absorption expectations lengthening, and increased red tape related to regulatory code could continue to pressure fundamentals.”