Demand for apartments has picked up in 2021. With a tight housing market, more people are opting to rent until things calm down. That's driving demand for apartments and pushing up rental rates in the process.
While rent growth is strong across the country -- rents rose 9.8% nationally in June, the fastest annual pace since 2015 -- it's strongest across the Sun Belt region due to continuing migration. That's benefiting real estate investment trusts (REITs) focused on owning apartments in that part of the country.
A red-hot region
Mid-America Apartment Communities (NYSE: MAA) is benefitting from its strategic focus on high-growth markets across the Sun Belt region. The residential REIT noted in its second-quarter earnings report that: "Strong rent growth and high occupancy, driven by a growing demand for housing across the Sun Belt region, drove solid second-quarter results that were ahead of expectations."
Occupancy across the company's portfolio increased from 95.4% in the year-ago period to 96.4% in Q2 2021. The company also noted that lease rates rose 8.2% in the quarter.
Meanwhile, Mid-America noted that Q3 got off to a scorching start -- lease rates were up more than 12% over prior leases. Because of that and "continued robust leasing conditions," the company boosted its full-year earnings forecast.
Camden Property Trust (NYSE: CPT), which also focuses on high-growth Sun Belt markets, experienced similarly strong market conditions. Occupancy improved from 95.1% to 96% in Q2 2021, while new lease rates jumped 8%. Likewise, market conditions have further improved in Q3 -- the company's July occupancy was 96.9%, even while lease rates were up a sizzling 14.6%. Given those numbers, Camden also increased its full-year outlook.
Sun Belt-focused Preferred Apartment Communities (NYSE: APTS) saw similar robust demand. New lease rates were up a blistering 21.3% in July: "In-migration and employment trends in our markets remain robust, driving strong demand for our well-located multifamily" properties, stated Joel Murphy, the company's CEO.
The REIT also benefits from strong occupancy, which improved from 94.7% in Q2 2020 to 96.9% last quarter. Because of that, Preferred Apartment Communities also raised its full-year forecast.
Laying the groundwork for future growth
With occupancy approaching capacity, these REITs are developing new multifamily properties across the Sun Belt region. Mid-America is currently investing $627.5 million to construct eight properties with 2,654 units. The company expects to complete three communities this year, two in 2022, and three the following year. As it finishes those projects, Mid-America will help drive additional funds from operations (FFO) growth.
Camden is also investing heavily to expand its portfolio in the Sun Belt region. The REIT is investing $907 million across eight communities with 2,608 units. Meanwhile, it spent another $11.4 million to acquire two vacant land parcels for future development purposes. These investments will enable the REIT to continue growing its FFO over the coming years as it benefits from steady migration to the Sun Belt region.
Meanwhile, Preferred Apartment Communities has been pivoting its portfolio to expand its multifamily operations across the Sun Belt region. The REIT recently sold off its remaining office properties, giving it the cash to expand its multifamily portfolio. It has since acquired multifamily communities in Fort Worth, Texas and Atlanta.
The company has also funded loans for developers to support the construction of new multifamily communities in Orlando, Florida, and Savannah, Georgia. Preferred Apartment Communities then has the option to purchase those properties upon stabilization. Compared to developing them internally, that strategy reduces risk.
This increased focus on expanding its multifamily portfolio in the Sun Belt region could drive outsized FFO growth for the REIT in the coming years.
Benefiting from a megatrend
Companies are increasingly relocating and expanding to the Sun Belt region due to its better business climate. That's bringing an abundance of jobs to the area and drawing in job seekers. Add in remote workers and retirees moving south for better affordability and weather, and demand for apartments is blazing hot.
With the pandemic accelerating the migration trend, demand for apartments isn't likely to cool down anytime soon. Because of that, landlords appear poised to continue cashing in on strong demand for apartments in the country's southern portion. And that makes REITs focused on this region look like compelling investment opportunities.