Multifamily REITs Keep Building New Units

Posted by Amrock

Multifamily real estate investment trusts (REITs) are pouring money into new development projects, which could have an adverse effect on the industry, reports National Real Estate Investor Online. The article reports that REITs are buying land and building, rather than paying “top dollar” for acquisitions. The pace of the development of new units reportedly has some analysts worried.

Building pace creating a downward rent pressure

“Both the volume and pace of new unit construction has been a concern in the multifamily space this year,” Camilla Yanushevsky, a senior analyst of real estate product operations at S&P Global Market Intelligence, told the news outlet. “The flood of new construction in 2017, is placing downward pressure on rents in some markets, specifically New York and San Francisco, which have been struggling with apartment rent growth.”

Pent-up demand and solid fundamentals

However, not all analysts are worried. “What has surprised me is that we don’t have even more construction,” said Calvin Schnure, an economist for the National Association of Real Estate Investment Trusts (NAREIT). “The fundamentals of the market are still really solid.”

Schnure argued there are about three to four million “pent-up” households “living doubled up with roommates” who benefit from the new apartment units coming online. “Even as new supply comes along it is snapped up pretty quickly… REITs could probably build a lot more product and still find people to fill those apartments,” he speculated.

Pace for past four years nearly steady

According to the article, the development pipeline for multifamily REITs is said to be around $10.7 billion worth of apartment properties, as of the second quarter of 2017. Schnure told the outlet his firm has tracked development at this pace for the past three to four years.

In contrast to office and retail REITs, multifamily REITs are still buying up land and building because REIT executives reportedly believe core markets still have enough renters to absorb new units. While rents are growing more slowly, and the number of units set to come online in 2018 is declining, the strategy so far is still working.

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