The red-hot housing market of 2021 and 2022 is officially over. Weakening demand continues as interest rates and inflation weigh on consumers.
And it's not just single-family homes that are feeling the pinch. December 2022 marked the fourth consecutive month rental rates have decelerated.
The slowing market has investors concerned over the future of popular residential real estate investment trusts (REITs) like MAA (MAA 0.71%), Camden Property Trust (CPT 0.26%), and Invitation Homes (INVH 0.53%). All three stocks are down 25% or more since last year. But their beaten-down share prices aren't necessarily a sign that trouble is ahead.
According to recent earnings, these three REITs -- which specialize in owning, developing, and leasing rental properties -- are still red hot. Is now the time to take advantage of their low prices?
Growth in the Sunbelt might slow, but these REITs still shine
MAA (formerly known as Mid-America Apartment Communities), Camden Property Trust, and Invitation Homes are three of the leading residential REITs. This is largely thanks to their top-tier portfolio of assets in high-growth markets. MAA and Camden operate similar portfolios of high-end multifamily apartment communities across the southern part of the country, while Invitation Homes focuses on leasing single-family rental properties.
The Sunbelt has blazed the way for rental growth and demand over the past decade with cities like Tampa and Orlando in Florida, Atlanta, Dallas, Phoenix, and Austin, Texas, seeing consistent record-breaking growth year over year. But that demand is cooling.
Robust construction over the last few years has led to more deliveries than the market is demanding, which in turn is pushing vacancy rates up. Vacancies aren't good for rental operators because they lead to higher costs and less revenue.
But all three REITs still have exceptionally high occupancy. At the start of 2023, the national average vacancy rate for multifamily properties was 5.7%. According to recent earnings reports, Camden's vacancy rate is only 3.4%, MAA's is 4.2%, and Invitation Homes' is 2.9%.
Rents are also still growing. As of the third quarter of 2022, Camden and MAA saw their blended rental rates for new and renewing leases grow by 14% year over year, while Invitation Homes saw its blended rates increase by 10%.
The double-digit growth that the rental industry saw over the past few years wasn't sustainable, and it was only a matter of time before things returned to normal. A lot of investors see the slowdown as a red flag, but nearly all markets these companies operate in are still posting positive rent growth -- just at a slower rate than before.
These top-tier stocks are trading at discounted pricing
MAA, Camden Property Trust, and Invitation Homes used the rental housing boom to better insulate their financials and lower their debt exposure, which was a smart move that can help sustain their dividends and control debt obligations in the near future.
Right now, Camden trades for the best valuation at around 15.6 times its trailing 12-month funds from operations (FFO), a metric that works similarly to price to earnings for REITs. MAA is trading around 21 times its FFO, and Invitation Homes trades at just 9.3 times. A year ago, these stocks couldn't be purchased for less than 25 to 30 times their FFO, so today's lower range is certainly suitable pricing.
Data by YCharts.
The rental market could continue slowing over 2023 and beyond, meaning investors should take a long-term approach when buying these REITs. But there's still massive demand for the housing that these operators provide. Given their favorable pricing and attractive dividend yields in the 2% to 3% range, right now is a great time to buy these red-hot stocks.
