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Investing in the Rental Property Boom

Written By Briton Ryle

Posted June 25, 2014

There is an interesting tug-of-war taking place in the residential rental market in the U.S.

At the one end of the rope are renters who are slowly increasing in number and slowly gaining more spending power as more jobs are created. At the other end are the landlords who are not building as many rental units as demand requires in order to get a better return from higher rents.

The result is more renters competing for fewer apartments, making it tough on the renters but very sweet for the landlords.

Let’s take a brief look at the demand/supply forces at play in America’s rental property sector, followed by a review of five of the best-performing rental property companies worth investing in.

Available Rental Units Declining

The overall snapshot of the residential rental market in the U.S. is one of concern for renters. According to recent data by the Federal Reserve Bank of Saint Louis, the vacancy rate of residential rental units has been declining rapidly since the last recession in 2009, as noted below.

residential vacancy rate

Source: Federal Reserve Bank of Saint Louis

What we have been witnessing over the past five years is a the biggest rush into rental units since the late 1960s, triggered by the collapse of the housing market in 2008-09, which forced married couples and families into rental units in addition to the typical single renters.

Further boosting the demand for rental units was the loss of some 8.5 million jobs from late 2007 to late 2009. Lower incomes put home ownership out of reach for more and more Americans, making rental their only option.

Since the recession ended in 2009, however, there has been an encouraging increase in employment, with some 8 million jobs created since 2010. But this has not slowed the rental market, as tighter credit and more stringent mortgage requirements are still preventing many from purchasing homes.

“Even though the single-family home market is coming back,” notes Brad Perozzi, managing director of The Picerne Group, an owner of residential rental properties in San Juan Capistrano, California, “it’s still somewhat cumbersome to obtain a mortgage and come up with a down payment.”

The result is a growing rental demand that is expected to remain strong for the foreseeable future. “We definitely see demand improving,” Perozzi adds, “especially the younger demographic coming out of college and being in their prime renter years.”

The availability of more jobs is allowing more young people to take apartments, while the tightness of credit is keeping older renters from moving out of theirs.

Cost of Rental Units Increasing

Despite this strong demand for apartments, new rental unit construction has not been keeping pace, as noted in the graph below. Despite a steady increase in recent years, new housing units overall (for ownership and rental) are still being created at their slowest rate in 50 years.

rental unit construction rate

Source: Federal Reserve Bank of Saint Louis

Add a demand that is growing rapidly to a supply that is growing slowly and you get rising prices, as noted in the graph below of rising shelter costs as a percentage of annual change.

rental demand shelter costs

Source: Federal Reserve Bank of Saint Louis

While shelter costs declined from 2006 to 2009 due to high vacancies, they have once again been on the rise since 2010 due to lower vacancies.

“April 2014 showed strong growth in the home rental market,” reports Ray White USA Property Sales, as “rental prices increased by 3.4 percent over the previous year.”

A report by AxioMetrics Inc. informs, “April’s figures show that 2014 is showing the best year-to-date [rental] growth since the economy began recovering from the Great Recession [2008-09].”

“With demand for apartments surging, rents are projected to rise for a fifth straight year. Even a rise in apartment construction is unlikely to provide much relief anytime soon,” reports USA Today. “That bodes well for building owners and their investors.”

Investing in Rental Properties

It also bodes well for investors wanting to tap the rising demand for and rising returns from rental properties. While investors can take the longer and harder route by becoming landlords themselves — purchasing their first rental property, renting it out for a few years, and then slowly adding a second and third property over time — they might be better off taking the shorter and easier route of simply investing in rental property companies, or REITs (Real Estate Investment Trusts).

The past five years have been a boon for REITs, many of which have vastly outperformed the broader market, including the five REITs plotted on the graph below. Let’s take them one by one, followed by a comparison of each company’s financial standing.

five year REIT real estate trust


1. Apartment Investment & Management Co. (NYSE: AIV) — The best performer of the five companies showcased had a 268% gain that more than doubled the S&P 500’s 110% gain over the past five years.

“Aimco… headquartered in Denver, Colorado… is one of the largest owners and operators of apartment homes in the country. Led by Chairman and CEO Terry Considine, Aimco is a top provider of apartment homes to nearly 250,000 residents. Aimco has properties in 24 states and the District of Columbia,” the company highlights.

“Aimco’s portfolio primarily focuses on B/B+ quality apartment homes. We define B properties as those near or slightly above median rent for a particular market.”

2. Essex Property Trust Inc. (NYSE: ESS) — The second-best performer of the five has gained 195% over the past five years.

“Essex has 133 apartment communities, comprising 27,143 units mainly in Southern California, the San Francisco Bay Area and the Seattle metropolitan area,” informs MSN Real Estate.

“The company also has four projects in development, representing an additional 581 apartment units. The company focuses on metropolitan markets with regional populations of more than 1 million, where the potential for apartment construction is limited and where houses and condos are expensive enough to keep demand for rental units high.”

3. Equity Residential (NYSE: EQR) — The third-best performer of the group gained 180% over the past five years.

“Equity Residential is an S&P 500 company focused on the acquisition, development and management of high-quality apartment properties in top U.S. growth markets,” the company introduces itself.

“Equity Residential owns and manages nearly 400 properties primarily located in Boston, New York, Washington, DC, South Florida, Seattle, San Francisco, Southern California and Denver.”

4. Avalon Bay Communities Inc. (NYSE: AVB) — The fourth company posted 155% gains over the past five years.

“AvalonBay Communities, Inc. is in the business of developing, redeveloping, acquiring and managing high-quality apartment communities in the high barrier-to-entry markets of the United States,” the company presents.

“These markets are located in the Northeast, Mid-Atlantic, Pacific Northwest and Northern and Southern California regions of the country. The Company owns, or holds interests in, hundreds of apartment communities with over 80,000 housing units in these markets. In addition, at any given time, the Company has a number of communities under construction and reconstruction, as well as holding future development rights for other communities.”

5. Camden Property Trust (NYSE: CPT) — The fifth company posted 154% gains over the past five years.

“Camden Property Trust is one of the largest publicly traded multifamily companies in the United States. Structured as a Real Estate Investment Trust (REIT), the company is engaged in the ownership, development, acquisition, management, and disposition of multifamily residential apartment communities,” the company informs. “As of March 31, 2014, Camden owned interests in and operated 168 properties containing 59,341 apartment homes across the United States.”

Camden Property Trust CPT REIT

In the table above, the financials of the five REITs showcased are compared to one another, with the top two in each category highlighted in green.

Although Camden Property Trust trails the others in five-year stock price appreciation, it does rank among the top two in each metric nine times — more than all the rest.

For its part, Apartment Investment & Management is the group’s best performer, counting eight times as one of the top two in each category.

Joseph Cafariello