As the real estate landscape continues to evolve in 2023, residential REITs are emerging as a promising investment opportunity. Despite cooling rent growth, apartment demand is showing signs of a solid rebound, with net absorption in the second quarter of 2023 nearing surging new supply levels, thereby stabilizing occupancy rates after a steep decline in 2022.

According to RealPage data, in the second quarter, net demand registered at 83,449 units, and this marked a five-quarter high. While this is still below the record numbers seen during the 2021 boom, it indicates a normalization of apartment demand.

What is interesting is that this demand rebound coincides with a 50-year high in apartment construction starting to convert into peak completions, with more than 107,000 units completed in the second quarter of this year itself. Also, RealPage data indicates that more than 1 million additional units are under construction at the end of June.

However, despite the supply surge, this solid demand is aiding in the mitigation of vacancy spikes in most markets, with U.S. apartment occupancy coming at 94.7% as of June, marking only a 0.1 percentage point decline since January. It marks a notable improvement compared to the occupancy fall of 1.2 percentage points in the first half of 2022 and then an additional 1.4 percentage points in the second half of the year.

However, rent growth remains below normal in 2023, with year-over-year effective asking rent growth at just 1.5%. This is due to apartment operators prioritizing occupancy rates over rents, leading to more options for renters and putting downward pressure on rent growth. Same-store effective asking rents increased only 0.46% between May and June 2023.

Stock Picks

We now focus on three residential REITs, which currently have a Zacks Rank #2 (Buy). These residential REITs — AvalonBay Communities, Inc. (AVB Quick QuoteAVB - Free Report) , Equity Residential (EQR Quick QuoteEQR - Free Report) and Invitation Homes Inc. (INVH Quick QuoteINVH - Free Report) — have shown stability and resilience, sustainable financial performance and strategic positioning in high-demand markets. Potential investors seeking exposure to the residential real estate sector may find these REITs attractive options. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

AvalonBay Communities: AVB has established itself as a leading player in the residential REIT sector, with a strong portfolio of high-quality apartment communities. The company's geographic diversification, focus on urban infill locations and disciplined capital allocation have positioned it favorably. AVB's financials have shown resilience despite challenging market conditions, with solid occupancy rates and rental revenue growth.

AvalonBay is banking on technology, scale and organizational capabilities to drive innovation and margin expansion in its portfolio. Investors can expect healthy revenue and funds from operations (FFO) growth for AVB in the second quarter of 2023 propelled by these favorable market dynamics.

Per its operational update released in June, AvalonBay reported a 6.5% increase in same-store residential rental revenues for the two months ended May 31, 2023 compared with the prior-year period. This is roughly 80 basis points higher than the company’s expectation on Apr 26, 2023.

AvalonBay Communities is set to announce its second-quarter 2023 earnings on Jul 31 after market close. The Zacks Consensus Estimate of $675.5 million for second-quarter revenues suggests a 4.8% year-over-year increase.

Before the second-quarter earnings release, the company’s activities were adequate to gain analysts’ confidence. The Zacks Consensus Estimate for the quarterly core FFO per share has been revised two cents north in the past three months to $2.59. This implies year-over-year growth of 6.58%.

Equity Residential: EQR, boasting a robust presence in the urban and high-density suburban regions, is set to benefit from the apartment market's rebound. The company has maintained solid occupancy rates and rent growth while benefiting from a recovering urban core. It has a healthy balance sheet and banks on technology, scale and organizational capabilities to drive growth.

Equity Residential’s target resident is more affluent, with lower unemployment and favorable prospects ahead. EQR is likely to report solid financial results for the second quarter of 2023.

Moreover, during the second quarter, Equity Residential bolstered its 2023 earnings guidance, citing continued strong demand in its markets, particularly New York, and lower-than-expected delinquency rates, mainly in Southern California. The revision reflected optimism from the company’s leadership. President and CEO Mark J. Parrell noted limited new apartment supply in most of EQR's markets, and high prices and the low availability of single-family homes as favorable factors for its outlook.

Equity Residential is slated to report second-quarter 2023 results on Jul 27 after the closing bell. Currently, the Zacks Consensus Estimate for EQR’s quarterly revenues stands at $714.8 million, indicating a 4.04% increase year over year. The Zacks Consensus Estimate for the quarterly normalized FFO per share of 94 cents suggests year-over-year growth of 5.6%.

Invitation Homes: INVH, as one of the leading single-family rental REITs, has shown resilience in its financial performance. The company's focus on the single-family rental market offers a unique investment opportunity. Invitation Homes’ ability to provide quality homes and superior resident experiences has led to high occupancy rates and consistent rental income growth.

INVH focuses on high-growth markets and in-fill neighborhoods with proximity to jobs, transportation and schools. Furthermore, the company's strategic geographic diversification and robust technology platform contribute to its competitive advantage. Given its strong financials and unique position in the market, Invitation Homes is recommended for investors seeking exposure to the single-family rental sector.

INVH is set to announce its second-quarter 2023 earnings results on Jul 26 after market close. The Zacks Consensus Estimate for quarterly revenues is currently pegged at $599.45 million. This indicates a 7.6% year-over-year rise.

Before the second-quarter earnings release, the company’s activities were adequate to gain analysts’ confidence. The Zacks Consensus Estimate for the quarterly core FFO per share has been revised north to 45 cents in the past month. Also, this suggests year-over-year growth of 7.14%.

Here’s how AVB, EQR and INVH have performed over the past three months.

Image Source: Zacks Investment Research

Wrapping Up

In conclusion, the rebound in apartment demand, coupled with the strategic focus of these REITs on high-demand markets and development, positions them well for future growth. Investors seeking to capitalize on the current real estate market dynamics should consider these REITs as potential additions to their portfolios. Each of these REITs presents a unique value proposition, and their strong financial performance in the current market environment suggests that they are well-positioned to capitalize on healthy fundamentals.

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.