Apartment landlords are benefiting from red-hot demand these days. Surging home prices are keeping prospective buyers at bay, forcing many to stay in their apartments. These market conditions are driving up occupancy levels, enabling landlords to boost rents.
Rents are rising fastest in the Sun Belt region. That's proving to be a boon for real estate investment trusts (REITs) focused on owning apartments in that part of the country.
Blistering rent growth in this region
AvalonBay Communities (AVB 1.66%) is one of the country's largest apartment operators. It owns interests in 297 communities with nearly 88,000 units across a dozen states.
Rents are rising across all regions where it operates, with its rental revenue increasing 8.5% in the first quarter. However, they're growing fastest across the Sun Belt region. The apartment REIT's rental revenue spiked 25.3% in Southeast Florida, 12.6% in Southern California, and 11.7% in Denver, CO. For comparison's sake, rental revenue in Northern California only rose 3.8%, while the Mid-Atlantic experienced 4.9% growth.
The surge in rents across the south is driving the REIT to invest more money in the region. It recently started construction on a new $135 million 304-unit community in Denver. Meanwhile, it acquired a 207-unit community in Lafayette, CO., for $95 million. The REIT also agreed to provide $52.6 million of funding for a third-party multifamily development project in Denver. The company is helping fund these new investments by selling three communities in the Northeast for $235 million, further shifting its portfolio mix to faster-growing cities.
Focused on the right region
Camden Properties Trust (CPT 3.10%) is an apartment REIT with over 58,000 units spread across 15 major markets. The company focuses on markets predominantly across the Sun Belt region experiencing significant employment and population growth. That strategy is paying big dividends for the REIT this year.
The company reported a 97.1% occupancy level in the first quarter, up from 95.9% in the year-ago period. With occupancy levels high across its operating areas, turnover is low, enabling it to push through significant rental rate increases. Renewal rates were 14.4% above the prior rates, while the rate on new leases was 15.8% above the previous level.
Those strong market conditions bode well for the company's future. They should drive continued rent growth at its existing properties while boosting the returns of its expansion-related investments. Camden is investing $628.5 million to build another 1,839 apartments across five new communities. Meanwhile, the company added several new potential projects to its development pipeline by acquiring land in Texas and North Carolina. The REIT also spent $1.1 billion to increase its ownership interest in 7,247 apartment units to 100%.
Strong market conditions should continue
Mid-America Apartment Communities (MAA 2.55%) is also benefiting from its Sun Belt-focused portfolio. The company owns an interest in 101,959 apartment units across 16 states in the Southeast, Southwest, and Mid-Atlantic regions. That location focus is driving strong rental growth rates.
In the first-quarter earnings release, CEO Eric Bolton stated:
Results for the first quarter were ahead of expectations. Continued strong demand for apartment housing is supporting solid rent growth, high occupancy and low resident turnover. Leasing traffic across our portfolio continues to accelerate and we are carrying strong pricing momentum into the busy summer leasing season. We expect leasing conditions will remain very favorable and as a result we have increased our expectations for growth in Core FFO for the year.
Driven by low turnover and a 95.9% occupancy level, renewal rates jumped 17.5%. Meanwhile, rates on new leases were 16.1% higher than the previous lease rate.
Given the strong market conditions, Mid-America started another new apartment development in the quarter, bringing its pipeline to five projects at a total cost of $444 million. It expects to begin four to six more projects in the next 18 to 24 months. The company also continues to invest in refurbishing older apartments to improve their appeal to renters. It completed 1,098 renovations in the quarter, capturing an 11% increase compared to non-renovated units. The company expects to finish between 4,900 and 5,900 unit renovations this year. These investments should help expand its ability to capture higher rents in the future.
These REITs are focusing on the right location
Location is one of the most important factors for success in real estate investing. That's evident in the results of apartments REITs focused on the Sun Belt region in the first quarter. With more people and jobs flowing into those regions, these REITs are expanding their portfolios to capture more of the upside potential. They could therefore continue posting big numbers, making them look like excellent investments for the long term.