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Zacks Industry Outlook Highlights AvalonBay Communities, Equity Residential and Invitation Homes
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For Immediate Release
Chicago, IL – July 26, 2024 – Today, Zacks Equity Research discusses AvalonBay Communities, Inc. (AVB - Free Report) , Equity Residential (EQR - Free Report) and Invitation Homes Inc. (INVH - Free Report) .
The REIT And Equity Trust - Residential Industry constituents are expected to benefit from the surge in demand in the market. Renting apartment units is a viable option as mortgage rates are high, and the transition from renter to homeowner is difficult with the high costs of homeownership. Also, leveraging tech-driven features is likely to help residential REITs capitalize on this healthy demand while achieving operational efficiency.
This augurs well for industry players like AvalonBay Communities, Inc., Equity Residential and Invitation Homes Inc. However, the elevated supply of new units is likely to weigh on rent growth and occupancy levels.
About the Industry
The Zacks REIT And Equity Trust - Residential category is engaged in owning, developing and managing a variety of residences. The types of residences include apartment buildings, student housing, manufactured homes and single-family homes. Residential REITs rent spaces in these properties to tenants and earn rental income in return. Markedly, some residential REITs focus on specific classes or types of residences or a particular geographical region.
Moreover, unlike apartment buildings, manufactured homes and single-family homes that are open for leasing to all, student housing units are leased only to students. Therefore, such real estate is generally required to be set up within or in places closer to colleges and universities. Furthermore, the enrollment growth of educational institutes is a major driver of student housing assets.
What's Shaping the REIT and Equity Trust - Residential Industry's Future?
Healthy Rental Demand: Despite elevated supply in a number of markets, demand for rental residential units remains strong, as evidenced by high absorption rates. Factors such as ongoing wage growth, a resilient labor market and favorable demographic trends are fueling new household formation and driving this demand.
Additionally, high mortgage rates have increased the cost of homeownership relative to renting, making the transition from renter to homeowner more challenging. As a result, renting apartment units has become a more affordable and flexible option. In Fall 2024, U.S. student housing pre-leasing is continuing to grow at a seasonally normal rate. Although the momentum has slowed compared to the previous two years, it remains above pre-pandemic trends, per RealPage data.
Technological Initiatives: Adapting to the changing times, residential REITs are incorporating modern technologies to improve customer experience and attract tenants. Features such as self-guided property tours, digital move-in processes, smart home technology, building-wide Wi-Fi and AI-powered sales tools have enhanced operational efficiency by reducing costs. Hence, in this digital age, leveraging technology and organizational capabilities is expected to give residential REITs a competitive advantage and drive long-term net operating income (NOI) growth.
Elevated Supply of New Apartment Units: The residential real estate market is experiencing a significant increase in new deliveries. According to data from RealPage Market Analytics, more than half a million new market-rate apartment units were delivered in the past 12 months (ending the second quarter of 2024). This surge in supply is putting pressure on rental rates despite strong demand, as operators focus on maintaining occupancy levels to ensure steady cash flow. With a substantial delivery pipeline in place, supply is expected to stay high in the near future, keeping rent growth under check.
Zacks Industry Rank Indicates Bright Prospects
The REIT And Equity Trust - Residential industry is housed within the broader Finance sector. It carries a Zacks Industry Rank #52, which places it in the top 21% of around 250 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates robust near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry's positioning in the top 50% of the Zacks-ranked industries is a result of the upward funds from operations (FFO) per share outlook for the constituent companies in aggregate. Looking at the aggregate FFO per share estimate revisions, it appears that analysts are gaining confidence in this group's growth potential.
Before we present a few stocks that you may want to consider for your portfolio, let's take a look at the industry's recent stock-market performance and valuation picture.
Industry Underperforms the Sector & the S&P 500
The Zacks REIT And Equity Trust - Residential industry has underperformed the broader Zacks Finance sector and the S&P 500 composite over the past year.
The industry has advanced 0.9% during this period compared with the S&P 500's increase of 22.3%. The broader Finance sector has rallied 19.9%.
Industry's Current Valuation
On the basis of the forward 12-month price-to-FFO ratio, which is a commonly used multiple for valuing residential REITs, we see that the industry is currently trading at 17.11X compared with the S&P 500's forward 12-month price-to-earnings (P/E) of 21.71X. The industry is trading above the Finance sector's forward 12-month P/E of 15.74X.
Over the last five years, the industry has traded as high as 26.24X and as low as 13.68X, with a median of 18.78X.
3 Residential REITs to Bet On
AvalonBay Communities: AVB has established itself as a leading player in the residential REIT sector, with a strong portfolio of high-quality apartment communities. It is well-poised to gain from the healthy renter demand for its residential properties in the high barrier-to-entry regions of the United States, as favorable demographic trends and rising home ownership costs are likely to keep driving demand.
The company's efforts to leverage technology and scale to drive margin expansion and operational efficiency seem encouraging. Strategic buyouts and development projects, backed by a healthy balance sheet position, augur well for long-term growth.
In May, AvalonBay announced a second-quarter 2024 operating update. The update highlighted witnessing a stable physical occupancy and like-term effective rent change accelerating in May from the previous month. It also witnessed lease-up activities outperforming its expectations.
The Zacks Consensus Estimate for the current-year FFO per share has been revised marginally north over the past two months to $10.92. The consensus mark for 2025 FFO per share has also been revised upward in the same time frame to $11.47, and it calls for a 5.1% year-over-year increase. The company's shares have risen 7.6% in the past three months.
Equity Residential: Equity Residential, boasting a robust presence in the urban and high-density suburban regions, is set to benefit from the favorable apartment market fundamentals.
The high cost of home ownership is likely to keep renter demand up in its markets, aiding the company. Its portfolio diversification efforts into the suburban markets to capture demand are encouraging. A focus on technology and organizational capabilities to drive margin expansion and operational efficiency augur well.
Moreover, during the second quarter, Equity Residential announced that it expects its 2024 same-store revenues, NOI and normalized FFO per share results toward the higher end of its existing guidance ranges. This latest projection came with the residential REIT experiencing sustained high demand across its market, which is pushing physical occupancy above expectations. Also, strong pricing power in its East Coast markets and continued recovery in its West Coast markets are tailwinds.
Equity Residential currently carries a Zacks Rank #2. The Zacks Consensus Estimate for its 2024 FFO per share has been revised marginally north to $3.88 in the past three months and suggests a year-over-year increase of 2.6%. Moreover, the consensus mark for 2025 FFO per share calls for a 3.2% increase year over year. The company's shares have risen 7.5% in the past three months.
Invitation Homes: This REIT is an owner and operator of single-family homes for lease and offers its residents high-quality homes in sought-after neighborhoods across the United States. INVH focuses on markets with strong demand drivers, high barriers to entry and high rent growth potential. It mainly operates in the Western United States, Texas, Florida and the Southeast United States markets.
Given INVH's ability to offer updated homes with modern features and the proximity to jobs and access to good schools, it is likely to continue enjoying healthy rental demand. This will help drive occupancy rates at its properties and maintain decent rental rate growth.
Invitation Homes currently carries a Zacks Rank #2. The Zacks Consensus Estimate for the current-year FFO per share has been revised a cent upward over the past two months to $1.88, suggesting a 6.2% year-over-year increase, backed by 8.2% growth in revenues. The company's shares have rallied 3.6% in the past three months.
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.
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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights AvalonBay Communities, Equity Residential and Invitation Homes
For Immediate Release
Chicago, IL – July 26, 2024 – Today, Zacks Equity Research discusses AvalonBay Communities, Inc. (AVB - Free Report) , Equity Residential (EQR - Free Report) and Invitation Homes Inc. (INVH - Free Report) .
Industry: Residential REITs
Link: https://www.zacks.com/commentary/2309186/3-residential-reits-to-bet-on-amid-bright-industry-prospects
The REIT And Equity Trust - Residential Industry constituents are expected to benefit from the surge in demand in the market. Renting apartment units is a viable option as mortgage rates are high, and the transition from renter to homeowner is difficult with the high costs of homeownership. Also, leveraging tech-driven features is likely to help residential REITs capitalize on this healthy demand while achieving operational efficiency.
This augurs well for industry players like AvalonBay Communities, Inc., Equity Residential and Invitation Homes Inc. However, the elevated supply of new units is likely to weigh on rent growth and occupancy levels.
About the Industry
The Zacks REIT And Equity Trust - Residential category is engaged in owning, developing and managing a variety of residences. The types of residences include apartment buildings, student housing, manufactured homes and single-family homes. Residential REITs rent spaces in these properties to tenants and earn rental income in return. Markedly, some residential REITs focus on specific classes or types of residences or a particular geographical region.
Moreover, unlike apartment buildings, manufactured homes and single-family homes that are open for leasing to all, student housing units are leased only to students. Therefore, such real estate is generally required to be set up within or in places closer to colleges and universities. Furthermore, the enrollment growth of educational institutes is a major driver of student housing assets.
What's Shaping the REIT and Equity Trust - Residential Industry's Future?
Healthy Rental Demand: Despite elevated supply in a number of markets, demand for rental residential units remains strong, as evidenced by high absorption rates. Factors such as ongoing wage growth, a resilient labor market and favorable demographic trends are fueling new household formation and driving this demand.
Additionally, high mortgage rates have increased the cost of homeownership relative to renting, making the transition from renter to homeowner more challenging. As a result, renting apartment units has become a more affordable and flexible option. In Fall 2024, U.S. student housing pre-leasing is continuing to grow at a seasonally normal rate. Although the momentum has slowed compared to the previous two years, it remains above pre-pandemic trends, per RealPage data.
Technological Initiatives: Adapting to the changing times, residential REITs are incorporating modern technologies to improve customer experience and attract tenants. Features such as self-guided property tours, digital move-in processes, smart home technology, building-wide Wi-Fi and AI-powered sales tools have enhanced operational efficiency by reducing costs. Hence, in this digital age, leveraging technology and organizational capabilities is expected to give residential REITs a competitive advantage and drive long-term net operating income (NOI) growth.
Elevated Supply of New Apartment Units: The residential real estate market is experiencing a significant increase in new deliveries. According to data from RealPage Market Analytics, more than half a million new market-rate apartment units were delivered in the past 12 months (ending the second quarter of 2024). This surge in supply is putting pressure on rental rates despite strong demand, as operators focus on maintaining occupancy levels to ensure steady cash flow. With a substantial delivery pipeline in place, supply is expected to stay high in the near future, keeping rent growth under check.
Zacks Industry Rank Indicates Bright Prospects
The REIT And Equity Trust - Residential industry is housed within the broader Finance sector. It carries a Zacks Industry Rank #52, which places it in the top 21% of around 250 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates robust near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry's positioning in the top 50% of the Zacks-ranked industries is a result of the upward funds from operations (FFO) per share outlook for the constituent companies in aggregate. Looking at the aggregate FFO per share estimate revisions, it appears that analysts are gaining confidence in this group's growth potential.
Before we present a few stocks that you may want to consider for your portfolio, let's take a look at the industry's recent stock-market performance and valuation picture.
Industry Underperforms the Sector & the S&P 500
The Zacks REIT And Equity Trust - Residential industry has underperformed the broader Zacks Finance sector and the S&P 500 composite over the past year.
The industry has advanced 0.9% during this period compared with the S&P 500's increase of 22.3%. The broader Finance sector has rallied 19.9%.
Industry's Current Valuation
On the basis of the forward 12-month price-to-FFO ratio, which is a commonly used multiple for valuing residential REITs, we see that the industry is currently trading at 17.11X compared with the S&P 500's forward 12-month price-to-earnings (P/E) of 21.71X. The industry is trading above the Finance sector's forward 12-month P/E of 15.74X.
Over the last five years, the industry has traded as high as 26.24X and as low as 13.68X, with a median of 18.78X.
3 Residential REITs to Bet On
AvalonBay Communities: AVB has established itself as a leading player in the residential REIT sector, with a strong portfolio of high-quality apartment communities. It is well-poised to gain from the healthy renter demand for its residential properties in the high barrier-to-entry regions of the United States, as favorable demographic trends and rising home ownership costs are likely to keep driving demand.
The company's efforts to leverage technology and scale to drive margin expansion and operational efficiency seem encouraging. Strategic buyouts and development projects, backed by a healthy balance sheet position, augur well for long-term growth.
In May, AvalonBay announced a second-quarter 2024 operating update. The update highlighted witnessing a stable physical occupancy and like-term effective rent change accelerating in May from the previous month. It also witnessed lease-up activities outperforming its expectations.
AvalonBay currently carries a Zacks Rank of 2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for the current-year FFO per share has been revised marginally north over the past two months to $10.92. The consensus mark for 2025 FFO per share has also been revised upward in the same time frame to $11.47, and it calls for a 5.1% year-over-year increase. The company's shares have risen 7.6% in the past three months.
Equity Residential: Equity Residential, boasting a robust presence in the urban and high-density suburban regions, is set to benefit from the favorable apartment market fundamentals.
The high cost of home ownership is likely to keep renter demand up in its markets, aiding the company. Its portfolio diversification efforts into the suburban markets to capture demand are encouraging. A focus on technology and organizational capabilities to drive margin expansion and operational efficiency augur well.
Moreover, during the second quarter, Equity Residential announced that it expects its 2024 same-store revenues, NOI and normalized FFO per share results toward the higher end of its existing guidance ranges. This latest projection came with the residential REIT experiencing sustained high demand across its market, which is pushing physical occupancy above expectations. Also, strong pricing power in its East Coast markets and continued recovery in its West Coast markets are tailwinds.
Equity Residential currently carries a Zacks Rank #2. The Zacks Consensus Estimate for its 2024 FFO per share has been revised marginally north to $3.88 in the past three months and suggests a year-over-year increase of 2.6%. Moreover, the consensus mark for 2025 FFO per share calls for a 3.2% increase year over year. The company's shares have risen 7.5% in the past three months.
Invitation Homes: This REIT is an owner and operator of single-family homes for lease and offers its residents high-quality homes in sought-after neighborhoods across the United States. INVH focuses on markets with strong demand drivers, high barriers to entry and high rent growth potential. It mainly operates in the Western United States, Texas, Florida and the Southeast United States markets.
Given INVH's ability to offer updated homes with modern features and the proximity to jobs and access to good schools, it is likely to continue enjoying healthy rental demand. This will help drive occupancy rates at its properties and maintain decent rental rate growth.
Invitation Homes currently carries a Zacks Rank #2. The Zacks Consensus Estimate for the current-year FFO per share has been revised a cent upward over the past two months to $1.88, suggesting a 6.2% year-over-year increase, backed by 8.2% growth in revenues. The company's shares have rallied 3.6% in the past three months.
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.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +7.0 average gain per year. Amazingly, they soared with average gains of +44.9%, +48.4% and +55.2% per year.
Today you can access their live picks without cost or obligation.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.