Apartment Rents Are Too Low

Core Viewpoint - Apartment rental rates are significantly below equilibrium and are expected to rise materially as the market normalizes around 2027 [1][19] Data Points - Since January 2017, apartment rents have increased by approximately 28%, while CPI inflation has risen by 30% and wage growth has been 37% [6][8] - The rental rate growth has been concentrated, with a notable 20% increase occurring in 2021-2022, but overall rent growth has been flat in the remaining years [4][5] - Home prices have appreciated by about 78% since 2017, making apartments relatively more affordable compared to home ownership [11] Factors Affecting Rental Rates - The oversupply of apartments is attributed to a zero interest rate policy, which led to a surge in apartment construction [13][17] - Vacancy rates are projected to rise to around 7% due to the influx of new apartment deliveries, forcing landlords to lower rents to attract tenants [15][16] Restoration of Equilibrium - A slowdown in apartment starts in late 2023 and 2024 is expected to lead to below-trend supply in 2025 and 2026, which should help restore equilibrium [18] - Once equilibrium is restored, apartment rents are anticipated to grow by 10%-20% [19][23] Investment Opportunities - Apartment REITs are currently trading at lower multiples, with the average apartment REIT trading at 17X AFFO as of January 2025 [21] - The market sentiment regarding weak rental rate growth in 2024 and 2025 presents a buying opportunity, as the oversupply is viewed as temporary [22] - Specific REITs such as Essex (ESS) and Avalon Bay (AVB) are less affected by oversupply, while Sunbelt apartment REITs are trading at discounted multiples despite long-term growth potential [27]