Apartment rents may be cooling off
Landlords are finding it harder to boost monthly rents as more apartment complexes open and as the housing market starts to rebound.
That's why landlords have been able to raise rents easily, 9% in recent years and often larger increases in hot markets. In fact, investing in apartments was very lucrative in 2010, 2011 and 2012.
But that may be slowing, according to The Wall Street Journal. Rent increases are starting to cool down as apartment developers put new units on the market.
At the same time, builders are starting to boost the supply of new homes for sale around the country, as the housing market is showing more signs of strength.
And people looking for homes are doing the math, of deciding if it's cheaper to buy or rent. For buyers, buying vs. renting was an easy answer when property values were falling: No.
It's a more complex question if buyers think prices will move higher. If you think the market is stable or rising, then you can think of the question on a tax-adjusted basis, which brings the mortgage deduction and property taxes to bear.
That is, the cost of owning a home -- after deductions for mortgage and interest and property taxes -- may, in fact, be cheaper than renting, and owning offers the opportunity of property appreciation. Renting offers only shelter.
Right now, stock-market investors think renting may be losing its cachet.
As The Journal noted, real estate investment trusts that invest in apartments produced the lowest total returns (price plus dividends) in the first quarter of any sector of REITS.
Overall, the group had a 0.11% return, according to the National Association of Real Estate Investment Trusts. That compares with 18.6% for REITs that concentrate on mixed industrial-office properties, or 15.5% for timber-oriented REITS or 17.4% for REITs that invest in manufactured homes.
It also means that the stock prices for apartment REITs were mediocre performers at best during the quarter.
In fact, Essex Property (ESS), a big West-Coast apartment developer, gained 3.4% in the quarter before dividends. BRE Properties (BRE), another West-Coast-oriented REIT, fell 4.2%. Avalon Bay Communities (AVB), one of the largest apartment REITS, was down 6.6%.
The FTSE NAREIT All REITS Index, the broadest index of the U.S. REIT market, delivered a 9.11% total return in the first quarter. The FTSE NAREIT All-Equity REITs Index delivered a total return of 8.10%. That compares with the 11.9% return for the Dow Jones Industrial Average Total Return Index ($DJITR) and a 10.6% total return for the S&P 500.
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