Multi-Family REITs Ride High: SNL Study

Multi-family-focused REITs have the edge over the rest of the REIT industry, reports SNL Real Estate.

According to a new report by Charlottsville, Va.-based SNL Real Estate, REITs specializing in multi-family assets have the edge over the rest of the REIT industry. The well-known demand for multi-family rental properties is on the rise, while at the same time the multi-family segment has more liquidity than any other kind of real estate, thanks to the efforts of Fannie Mae and Freddie Mac.

“These positive effects are visible in several metrics when comparing multi-family REITs to the broader REIT market,” notes the report by SNL analyst Chris Henderson. Stronger demand is reflected in rising occupancy at multi-family assets owned by REITs. In the first quarter of 2008, average occupancy at multi-family REIT portfolios stood at 93.5 percent, according to the report. By the first quarter of 2010, occupancy had ticked up to 94.9 percent. That compares very favorably with occupancy for the REIT industry as a whole, which averaged 86.2 percent during the first quarter.

SNL also reports that investors have enjoyed higher total returns from multi-family REITs than from the broader REIT market this year, with the SNL US REIT Multi-Family Index posting a return of 33.5 percent as of August 2. The return for the SNL US REIT Equity Index, by comparison, was 19.7 percent during the same period.

The report does offer a caveat to multi-family REITs and their investors, however. “While multi-family REITs have benefitted from an economic environment that has discouraged tenants from moving out, multi-family REITs must also be wary of a decrease in the gap of costs related to renting versus buying,” it warns.

In other words, the collapse of single-family home prices since 2007 might come back to haunt the rental residential industry. “With continued decreases in home pricing, many tenants that were previously against taking on the cost of homeownership may be willing to take that plunge going forward,” the report explains. “This could have a negative effect on multi-family REITs by either reducing occupancy as tenants acquire homes at discounted pricing, or forcing the REITs to reduce rents further to maintain current occupancy levels.”

SNL reported last month that REITs as a whole have had an active year thus far in terms of acquisitions. As of July 13, publicly traded REITs had spent about $7 billion to acquire 174 properties. For their part, non-traded REITs had purchased 192 properties at a cost of $5.13 billion. Of those totals, about $1.18 billion of multi-family properties were acquired by traded REITs; non-traded REITs snapped up another $310 million worth, SNL reported.