For years, leading residential REITs, or real estate investment trusts, focused on owning apartments in major gateway cities along the coasts. These high-cost metro areas benefited from steady demand due to strong employment markets. That enabled REITs concentrated in those cities to enjoy above-average rent growth.
However, the pandemic has changed the game. More companies are moving to lower-cost cities in the Sun Belt region, bringing jobs with them. Meanwhile, the rise in remote work allows more people to move to these cheaper, warmer cities. That's leading REITs to shift their strategies by increasingly focusing on owning apartments in the Sun Belt.
Three residential REITs putting a greater emphasis on that area are Equity Residential (NYSE: EQR), Preferred Apartment Communities (NYSE: APTS), and WashREIT (NYSE: WRE). That makes them stand out as compelling apartment REITs to consider buying this July.
Exchanging coastal gateway for Southern exposure
Equity Residential is one of the largest apartment REITs, with 304 properties and 77,889 units. It primarily focuses on the high-cost coastal gateway markets of Boston, New York, Washington, D.C., Seattle, San Francisco, and Southern California.
However, with the pandemic having an outsized impact on those locations, Equity Residential is shaking up its portfolio. It has sold $580 million of its properties in California and used the proceeds to reenter the Denver and Atlanta markets. It has purchased $565 million of properties in Denver over the past year and recently bought a property in Atlanta for $115 million. It noted that Atlanta's population and jobs markets are growing faster than its existing markets, which should drive continued above-average rent growth.
Equity Residential is still in the early days of its market expansion, reversing its prior strategic shift to coastal markets. The company remains interested in other potential markets, including Austin, Texas. Meanwhile, analysts believe Equity Residential could also return to Texas, Florida, and Arizona while potentially entering Nashville, Tennessee.
Going back to its roots
Preferred Apartment Communities is a residential REIT that has diversified into other property types over the years, including grocery-anchored shopping centers, student housing, and office buildings. However, it sold its student housing portfolio last year and recently agreed to unload most of its office portfolio. It's using the proceeds to repurchase the preferred equity used to finance its expansion and invest in growing its Sun Belt-focused multifamily portfolio.
The company has a unique strategy to expand its multifamily platform. It originates real estate loans to support multifamily development projects in the Southeast that include options to purchase the property upon completion. That helps limit its development risk while giving it a visible pipeline of acquisition opportunities.
For example, Preferred Apartment Communities closed a $16.8 million loan to finance the development of a 320-unit Class A multifamily community in Orlando, Florida, in March. Meanwhile, in May, it provided a $17 million loan to support the development of a 316-unit Class A multifamily community in Savannah, Georgia. The company's strategic refocus on multifamily properties in the Sun Belt could drive improved returns for its investors over the coming years.
Shifting its entire strategy
WashREIT is currently a diversified REIT focused on the Washington, D.C. metro area. However, the company is transforming into a multifamily REIT that intends on owning apartments across several large metro areas in the Southeast.
The company recently unveiled plans to accelerate that transition by agreeing to sell most of its office properties. It also signed a letter of intent to unload its retail portfolio and plans to market its remaining office building eventually.
The REIT intends on using the proceeds from those asset sales to repay debt and finance its multifamily expansion to the high-growth markets of Atlanta and Raleigh/Durham and Charlotte, North Carolina. WashREIT believes this strategy will diversify its geographic concentration risk while providing new growth opportunities as it benefits from above-average rental growth in the coming years. That focus on high-growth multifamily markets in the Southeast should enable it to create more value for investors than its current D.C.-focused diversified strategy.
Strategy shifts could pay big dividends for these apartment REITs
Large coastal gateway cities used to benefit from steady demand, driving above-average rental growth rates. However, the pandemic has accelerated the trend of businesses and people moving to the lower-cost Sun Belt region. That's leading REITs to shift their strategies away from the coasts to these faster-growing Southern cities. This shift in location could pay big dividends for Equity Residential, Preferred Apartment Communities, and WashREIT over the coming years. That upside makes this trio of apartment REITs stand out as attractive options this month.