The rental market, like the housing market, has experienced record year-over-year growth over the past two years. Rents rose as much as 17% at the peak in January 2022. But a recent report published by CoStar Group found that rental price growth was slowing across the country.
So where does that leave Mid-America Apartment Communities (MAA -1.49%), one of the premier residential real estate investment trusts (REITs)? Here's a closer look.
The Sun Belt is still shining
According to CoStar Group's report, the Sun Belt and the South remain above the national average for rent growth. Markets like Orlando and Tampa, Florida; Charlotte, North Carolina; Nashville, Tennessee; Dallas, and Atlanta -- all of which are among Mid-America's top 10 markets by net operating income (NOI) -- are seeing rental rates rise by 10% or more.
Mid-America's portfolio of 282 communities is almost exclusively located in the Sun Belt and the South. This gives the company a huge advantage given demand in these markets. In March 2022, around 15% of the company's new tenants came from states where it doesn't operate, like the Northeast or the West. The trend of moving south doesn't appear to be stopping.
The REIT's effective rent per unit, which accounts for costs related to owning and managing the rental property, has grown by 14% quarter to date -- higher than all quarters over the last two years.
Slowing growth doesn't mean no growth
It's important for investors to keep in mind that slowing growth doesn't mean no growth. It simply means the rate at which we've seen rents rise won't be maintained at record levels. Double-digit year-over-year rental growth was never sustainable. It was a frenzy driven by a critically low housing supply.
Rent growth that is slowing suggests the market is returning to more normalized levels, which isn't a bad thing. People will always need a place to live, and given that MAA serves middle- to higher-income earners in some of the hottest real estate markets in the country, it's positioned to maintain steady occupancy and demand.
Mid-America has been able to operate profitability for over a decade growing its funds from operations (FFO), an important metric to show REIT profitability by 111% over the last 10 years. It also managed to outperform the S&P 500, providing an annualized return of 13% over the past decade.
The company has accounted for slowing rental growth in its forecasts, yet still predicts its NOI will grow around 13.5% and effective rents to rise by 12%. Thanks to Mid America's robust redevelopment program, the company has 13,000 units it can improve to add value. Historically, its redevelopment and repositioning programs have increased the rental potential of those units by $120 on average.
Economic concern regarding the changes in the housing market, high inflation, and rising interest rates have caused its share price to falter. The company is down 28% year to date despite the REIT maintaining impressive earnings. Its dividend return of 3% is about double that of the S&P 500, plus its price to FFO is around 17 times, meaning it's a great time for investors to jump into this top-performing REIT.