The REIT And Equity Trust - Residential Industry constituents are likely to bear the brunt of elevated supply of rental units, which is expected to constrain rent growth and occupancy levels. Moreover, increased usage of concessions, particularly in the lease-up assets, may drive more residential move-outs.
Nevertheless, strong labor markets and favorable demographics drive robust demand, further supported by high homeownership costs and the flexibility of renting. Residential REITs can harness tech-driven solutions to capitalize on this demand while improving efficiency. Industry players like Equity LifeStyle Properties ELS, Veris Residential VRE and UMH Properties UMH are well-positioned to benefit.
About the Industry
The Zacks REIT and Equity Trust - Residential category includes companies that own, develop and manage various residential properties such as apartment buildings, student housing, manufactured homes and single-family homes. These REITs generate revenues by renting spaces to tenants. While most residential REITs lease properties like apartments and single-family homes to a broad range of tenants, student housing is exclusively leased to students. As a result, student housing properties are typically located near colleges and universities to serve their target demographic. Moreover, the demand for student housing is closely tied to enrollment growth at educational institutions, making it a key driver for this market segment. Some REITs may also focus on specific types of residences or regions to cater to the needs of local markets or particular tenant groups.
What's Shaping the REIT and Equity Trust - Residential Industry's Future?
Elevated Supply of New Apartment Units: The residential real estate market is witnessing a notable influx of new deliveries, which is creating pressure on rental rates despite strong demand. Operators are prioritizing maintaining occupancy levels to ensure steady cash flow, a strategy expected to continue in the near term. While the current wave of nationwide supply begins to peak, the construction pipeline is quickly depleting, suggesting promising occupancy and rent growth prospects in the coming years. However, in the near to mid-term, supply pressure in a number of markets is likely to constrain growth in rents.
Increased Use of Concessions: The proportion of units offering concessions has increased in recent quarters, with lease-up assets utilizing concessions more frequently than existing properties. As renters actively seek discounted apartment options, this trend could drive higher renter turnover. Additionally, in markets where renewal rents exceed new lease rents, turnover is likely to accelerate, especially in areas experiencing significant supply pressure.
Healthy Rental Demand: Despite elevated supply in several markets, demand for rental residential units remains strong, as indicated by high absorption rates. This trend is expected to continue in the current year. Key drivers include a strong labor market with job creation and wage growth, and favorable demographic trends that are fueling household formation. Moreover, due to the high cost of homeownership amid high mortgage rates, the transition from renter to homeowner is difficult, making renting apartment units a more flexible and viable option. A relatively unaffordable single-family housing market is also encouraging for residential landlords.
Technological Initiatives: Residential REITs are adopting technologies like self-guided tours, digital move-ins, smart home systems, and AI-driven tools to enhance tenant experience, streamline operations and cut costs. By leveraging these innovations, residential REITs are likely to gain a competitive edge and drive long-term net operating income growth, adapting effectively to evolving market demands and the digital age.
Zacks Industry Rank Indicates Bleak Prospects
The REIT and Equity Trust - Residential industry is housed within the broader Finance sector. It carries a Zacks Industry Rank #178, which places it in the bottom 29% of around 250 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates dim near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the downward funds from operations (FFO) per share outlook for the constituent companies in aggregate. Looking at the aggregate FFO per share estimate revisions, it appears that analysts are losing confidence in this group’s growth potential. Over the past year, the industry’s FFO per share estimates for 2024 and 2025 have moved down 8% and 5.5%, respectively.
However, before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Underperforms the Sector & S&P 500
The Zacks REIT and Equity Trust - Residential industry has underperformed the broader Zacks Finance sector and the S&P 500 composite over the past year.
The industry has returned 6.1% during this period compared with the S&P 500’s increase of 24.4%. The broader Finance sector has rallied 23.4%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-FFO ratio, which is a commonly used multiple for valuing residential REITs, we see that the industry is currently trading at 16.52X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 21.81X. The industry is trading marginally below the Finance sector’s forward 12-month P/E of 16.59X. This is shown in the chart below.
Forward 12-Month Price-to-FFO (P/FFO) Ratio
Over the last five years, the industry has traded as high as 26.19X and as low as 13.61X, with a median of 17.99X.
3 Residential REITs to Bet on
Equity Lifestyle Properties: This residential REIT is engaged in the ownership and operation of manufactured home communities, recreational vehicle (RV) resorts, campgrounds and marinas in North America, offering housing options as well as vacation opportunities. It focuses on high-quality coastal and Sunbelt retirement and vacation destinations and urban areas.
Equity Lifestyle is well-positioned to capitalize on robust demand fueled by favorable demographics, particularly from baby boomers, along with additional support from future generations. Furthermore, the United States has seen minimal manufactured home development over the past two decades. This combination of increasing demand and a constrained supply creates a significant strategic advantage for the REIT.
Equity Lifestyle currently carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for the 2024 FFO per share has been revised marginally north over the past three months to $2.92, indicating a 6.2% increase year over year. The consensus mark for 2025 FFO per share has also been revised upward over the past month to $3.11, implying a 6.6% year-over-year increase. The company’s shares have declined 8.2% in the past three months.
Veris Residential: This REIT owns, operates and develops multifamily rental properties located primarily in the Northeast, as well as a portfolio of non-strategic land and commercial assets.
The REIT boasts of the newest Class A portfolio in top-performing submarkets, commanding the highest average rent /unit and growth rate. It is poised to benefit from the highly scalable platform and its focus on a technology-guided/AI-based approach to revenue optimization.
Veris Residential currently carries a Zacks Rank #2. The Zacks Consensus Estimate for its 2024 FFO per share has been revised 7% north to 61 cents in the past month and suggests a year-over-year increase of 15.1%. Moreover, the consensus mark for 2025 FFO per share has been revised 3.4% upward over the same time frame. The company’s shares have gained 1.4% in the past six months.
UMH Properties, Inc.: The company is an owner and operator of manufactured home communities. UMH owns and operates 139 manufactured home communities containing around 26,200 developed homesites. These communities are located in New Jersey, New York, Ohio, Pennsylvania, Tennessee, Indiana, Maryland, Michigan, Alabama, South Carolina and Georgia.
The company’s ability to provide competitively priced quality homes is likely to help it witness healthy rental demand in the upcoming period, especially in a market where the gap between buying and renting is expected to continue in the following quarters, and mortgage rates remain high. Its communities continue to experience strong demand for both sales and rentals.
Also, the joint venture with Nuveen Real Estate, in which the company has ownership in and operates two communities in Florida, allows UMH to pursue accretive development deals while lowering the need for capital.
UMH Properties currently carries a Zacks Rank #2. The Zacks Consensus Estimate for its 2024 and 2025 FFO per share of 93 cents and $1.00 suggests a year-over-year increase of 8.1% and 7.5%, respectively. The company’s shares have gained 2.2% in the past six months.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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