The coronavirus pandemic has resulted in some major dislocations in the apartment market. Camden Property Trust (CPT 1.44%) was a beneficiary of some of the biggest shifts that took place. But good things can only go on for so long, and the slowdown in the real estate investment trust's (REIT's) business is probably a good thing.
Camden was in attractive markets
Camden owns 172 properties with a total of about 58,700 apartment units in them. The vast majority are in the Southern and Sunbelt regions. Roughly 60% are located in suburban markets. That was a very good footprint for the REIT to have during the pandemic.
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Work-from-home trends and social distancing pushed people out of major cities and toward more rural areas. And the long-term population shift toward warmer climates sped up, as well. So, demand was fairly strong for Camden's properties despite the pandemic.
Then, when inflation rose as the world moved past the pandemic only to face the lingering inflationary impact on supply chains, Camden was in a doubly strong position to raise its rents. Rents rose in the mid to high teens from the third quarter of 2021 through the third quarter of 2022. And then, as those massive rate bumps were lapped, rental growth rates plunged into the mid to low single digits.
Why did Camden's performance fall off a cliff?
Strong demand and fast-rising inflation gave Camden the backing it needed to make big rental increases. But such large hikes can't be imposed year after year without leading to some industry dislocations. For example, there's been a record setting construction boom in the apartment space as other landlords try to take advantage of the same opportunity. Current tenants, faced with yet another outsized rate increase, would likely try to move out and there are an increasing number of other choices available. So a slowdown in rental increases was pretty much inevitable, particularly since inflation, while still high, has started to slow from its earlier levels.
At this point, Camden is probably best viewed as operating at cruising speed. And while low single-digit rent increases aren't nearly as exciting as, say, 15%, they are far more normal. That said, there are still some markets where rental growth is running above 6%, like Denver, Nashville, and Orlando. And then there are others where growth is below 3.5%, such as Atlanta, Dallas, and Phoenix. Altogether, the numbers average out to 4.5%.
That said, there's an interesting dichotomy showing up in the rental-rate-increase numbers. For example, in May 2022, new leases were being written with 17.3% rent increases versus 14.5% on renewal leases for existing tenants. Push forward a year, and new leases are seeing 3.6% rent hikes compared to 6% for renewals. This suggests that competition for new tenants may be heating up in Camden's markets while existing tenants are willing to shoulder higher rates so they don't have to go through the effort of moving.
While that's an issue that investors should probably monitor, it isn't a terrible trend. Often, getting a new tenant in a competitive market requires a lot of effort, including concessions and/or free rent. Losing out a little on the rent front is much better than carrying an empty apartment that isn't generating any income at all.
Investors tend to go to the extreme
Camden's stock fell sharply in the early days of the coronavirus pandemic. Then, it rallied strongly while huge rental rates were being pushed through. With that in the past, the stock has again fallen sharply, down around 40% from its 2022 highs. What's interesting is that the stock is actually below the levels it was at prior to the pandemic. With the REIT's yield up to 3.9% and toward the high end of the historical yield range over the past decade, investors might want to take a second look now that the business is normalizing.
