5 Themes from 1Q23 REIT Earning Calls as Normalcy Reemerges
The spring leasing season is upon us. During the latest round of earnings calls, multifamily REIT executives noted positive momentum in 1st quarter 2023 and discussed that may or may not mean for prime leasing season. Here are the top five areas of focus for these REITs as they look toward a possible return to normal in the multifamily industry.
1. New supply will be elevated for the remainder of 2023 through 2024. Anticipated deliveries are not evenly spread throughout the nation, and pockets of heavy supply will exist throughout gateway and Sun Belt markets, as well as in urban and suburban submarkets. This bifurcation will certainly lead to more strategy than has been seen over the last two years, as lease up concessions are expected to have an impact on nearby stabilized properties. While overall concession values and the amount of units offering those concessions doesn’t yet appear to be rising, REIT executives are keeping an eye on these discounts. They anticipate continued demand and supply imbalances in select pockets throughout the U.S.
2. Apartment demand rebounded in 1st quarter 2023. Consistent with RealPage Market Analytics data, apartment REITs noted rebounded apartment demand in 1st quarter 2023, which indicates positive momentum heading into the spring and summer leasing season. Demand was slightly muted by non-pandemic historical norms, but when combined with solid job growth and improving consumer sentiment, it shows the resiliency of the apartment market. REIT executives also reiterated they have not yet seen any indicators of coupling, doubling up or roommates – all of which would indicate some affordability challenges. Rent-to-income ratios remain in the low 20% range, consistent with RealPage data.
3. Migration into the Sun Belt persists but not at pandemic peaks. REIT executives continue to note demographic tailwinds in the Sun Belt. Relative affordability, lower taxes, employment opportunity and weather remain selling points for Sun Belt markets. However, migration patterns during the pandemic have been illusive to track in real-time. The ability to quantify migration traffic and leads over the next five months or so will be key to strategizing as high supply could leave some REITs exposed in select locales.
4. As eviction moratoriums expire, bad debt continues to moderate towards historical levels. With courts backed up in most jurisdictions, the REITs anticipate a return to normal levels of bad debt by the end of 2023 into early 2024. Many REITs saw occupancy drop in 1st quarter, due to an increase in evictions and skips. Still, REIT executives expect occupancy to stabilize as demand picks up in prime leasing seasons as courts work through the backlog. Also, they noted that operating expenses may increase in the short term as they work to turn units back onto the market. Still, removing a non-paying renter in favor of a paying renter is key to increasing revenue growth.
5. Normal leasing seasonality is returning. Many aspects of life upended by the pandemic have already returned to normal, including apartment demand and leasing – at least preliminarily. Solid job growth, rising consumer sentiment and month-over-month apartment rent growth momentum all bode well for a return to normal seasonal leasing patterns, REIT executives noted. We may be tired of the word “normal,” but it’s welcomed vocabulary after years of “unprecedented.”