Millennials Rule at Multifamily

REITs
1/27/2016
Published in the January/February 2016 issue of REIT magazine.
Baby boomers have
defined Americas
cultural, political and
economic life in every
decade since they
came of age in the
1960s, but its time to
make way for the
millennials.
The millennial
generation, currently
age 18 to 34, has 75
million members, surpassing the baby boomers in 2015 to become
the largest population cohort in history, according to the Pew
Research Center. Catering to this new group of renters has forced
apartment REITs to reassess how they do business.
At the same time, millennials helped keep the residential REIT sector
going strong during a volatile 2015.

Residential REITs Outperforming

Over the longterm, apartment REITs typically run at about 3 to 3.5
percent annual growth from an operating perspective, says Richard
Campo, chairman and CEO of Camden Property Trust (NYSE: CPT).
He notes that for the past five years, Camden Property and most
other multifamily REITs have experienced 5.5 percent growth or
more.
Apartment stocks
outperformed the overall
REIT market in 2014, and
theyve done the same for
most of 2015, says Nick

Sector Stats
Sector: Residential
Constituents: 16
1Year Return: 16.33%

Joseph, a senior analyst

with Citi Research.
Multifamily REITs were up
16.5 percent in 2015, while
Equity REITs overall were up
roughly 3 percent for the
year.

3Year Return: 15.78%

5Year Return: 1.21%
Dividend Yield: 2.99%
Market Cap ($M): 116,586.7
Avg. Daily Volume (shares): 708M
(Data as of December 15, 2015)
Source: FTSE NAREIT U.S. Residential
REIT Index

Michael Schall, president

and CEO of Essex Property Trust (NYSE: ESS), says the residential REIT
sector performance had a positive and wild ride in 2015, driven by
the response to two opposing forces.
On the one hand, investors were concerned about the impact on
housing from weak global growth, interest rate uncertainty and the
divergence in performance for sectors of the U.S. economy, Schall
notes. On the other hand, apartment fundamentals are very solid
and have accelerated this year.
David Neithercut, president and CEO of Equity Residential (NYSE:
EQR), says nearly every market has significant demand and limited
supply. Millennials lifestyle choices factor into that, he says.
The millennials are the largest single segment of the population
weve ever seen, so theyre having a significant impact on
apartments, Neithercut says. Theyre marrying later than earlier
generations and having kids later, which means they tend to delay
homeownership longer.
A recent study by real estate data firm Zillow found that the average
firsttime homebuyer today rents for six years before buying,
compared with 2.6 years in the early 1970s.

Millennials Want Walkability

Renting increases job flexibility and allows millennials to live in
proximity to entertainment venues and their friends, Joseph says.
Theres definitely a reurbanization movement, but the suburbs
arent dead, either, says Joseph. Demand is there for rentals in
both urban and suburban areas. Multifamily REITs have different
strategies and territories of concentration. For example, Essex has

focused on metro areas on the west coast, while Equity Residential

invests in core urban markets on both coasts.
We have
repositioned our
portfolio in areas that
have the highest
WalkScores in either
cities or inner
suburban areas,
Neithercut says. He
explains that the
company wants to
invest in dynamic
areas with high
density development, but that includes both urban centers and
surrounding areas, such as Arlington, Virginia, and Cambridge,
Massachusetts.
Matt Birenbaum, chief investment officer of AvalonBay Communities
(NYSE: AVB), says the company has three brands, each designed to
meet the needs of different renters. Seventyfive percent of its
portfolio is invested in the luxury brand of apartments in urban and
suburban locations that attract people in their early 30s. Part of
AvalonBays strategy involves developing apartments in infill
suburban areas with access to transit systems and highly regarded
schools.
Were different than some of the other multifamily REITs in that we
have a balanced view of the urbansuburban trends, Birenbaum
says. Clearly, renters want walkability, transit access and higher
density development, but theres more supply in the urban
submarkets than in the suburbs.
For example, Birenbaum says the market surrounding Washington,
D.C., has 15 to 20 high density suburban nodes for development,
such as Potomac Yards in Virginia and Silver Spring in Maryland,
compared with just three or four near other major cities.
Theres a shift away from bedroom suburbs toward increasing
urbanization of some suburbs, he says, but urban core

development is incredibly expensive. Thats why you see so many

onebedroom apartments. We take a value approach and find the
best riskadjusted value in each marketwhether its in the city or
suburbs.
Schall agrees that while urban locations are desirable, some
suburban communities are experiencing growing demand, too.
Ignoring price, we believe that more millennials would choose an
urban location near jobs and entertainment, he says. However,
rents have increased faster than incomes in many markets, and
rental affordability has become a larger issue. As a result, our best
rent growth is now in suburban locations with transportation options
that allow a commute of less than 40 minutes.

Location, Technology, Social Interaction Are Key

The single most
important amenity to
millennials, Neithercut
says, is right outside
their apartments: the
location. While
bandwidth for mobile
devices and places
where they can work
outside their
apartments are
desirable basic
amenities, nothing matters so much as being in a location where
millennials want to play.
When we build apartments geared to millennials, were designing
places with smaller average unit sizes, mostly studios and one
bedrooms, Birenbaum says. Millennials are willing to trade off
private space for public spaces.
While Birenbaum says lounge areas with WiFi are essential to
millennials, AvalonBay also provides social experiences such as
tequila tastings in the lobby or food truck events. These enable
residents to build relationships, Birenbaum says. Other desirable
amenities include bike storage and repair areas, yoga rooms and

spin rooms, according to Birenbaum.

Petfriendly facilities are popular, according to Camdens Campo.
Since millennials are delaying having kids, they tend to have even
more pets than other tenants, he says. We estimate that we have
0.4 dogs per apartment, so in a 300unit building, thats 120 dogs. We
offer bark parks and sophisticated dog washing stations.
In addition to pet services and social amenities, Schall says Essex has
invested in technology to allow millennials to find apartments, make
payments and interact with property managers away from the
leasing office.

Millennials Future Needs

While it may seem as if apartments are being built on every city street
corner, Joseph says supply has still not surpassed demand. Likewise,
Alexander Goldfarb, a senior REIT analyst at Sandler ONeill Partners,
estimates that 70,000 or so apartment units are built each year, but
he says there are about 7 million more renters than there were a
decade ago.
The new building means that residential REITs carefully monitor
markets to avoid an apartment oversupply. As an example, Campo
says Camden Property Trusts stock performance in 2015 was partially
hurt by the fact that the company is headquartered in Houston,
where the economy slowed because of declining oil prices. He says
some projects may be put on hold there to rebalance the supply.
The supplydemand trend everywhere else in the country will
continue to be strong in 2016, Campo says. Were still only building
enough to absorb todays demand and not enough to fill the hole
created by the undersupply before the great recession and the
almost complete construction stop during it.
Joseph says rents will continue to rise in 2016 in most markets because
of the supplydemand dynamic, but perhaps at a slower pace than
in 2014 and 2015.
Even in markets like D.C., where there was a little bit of concern
about oversupply, we have a 95 percent occupancy rate,

Neithercut notes.

Move to Homeownership Should be Slow

Virtually all millennials
want to own a home
someday, according
to research from the
Urban Land Institute.
Yet, its not clear how
soon this generation
will start purchasing
property on a large
scale. Even if
millennials begin
buying homes at a
faster pace in future years, apartment owners arent concerned.
Not only is this segment of millennials large, but so is the next segment
following millennials and theyll need apartments, too, Neithercut
says.
According to the Pew Research Center, 26 percent of adults
between the ages 18 to 34, not including fulltime college students,
were living with their parents in 2015. Those young adults are likely to
form the next wave of renters in the coming years.
The millennials interest in buying homes may coincide nicely with
another demographic trend of about the same magnitude: that is,
retired baby boomers who seek to downsize, moving to highdensity
housing in urban locations or suburban properties with transit options,
allowing them to remain active despite health and mobility issues,
Schall says.

Interest Rate Impact Less Harmful to Multifamily

Sector
Like virtually every other industry on the planet, residential REITs are
coming to terms with higher interest rates.
There is a counterintuitive aspect to the markets reaction; that is,
interest rate normalization is a sign that the economy is improving,
which generally benefits the consumer and businesses, including

residential REITs, Schall says.

Campo points out that in spite of investor skittishness over rising
interest rates, residential REITs are doing well from an operating
viewpoint and will continue to do so because of fundamentals driven
by millennials and the housing shortage.
Investors are slightly nervous about the length of the economic
recovery, so weve started to slow our development cycle a little,
says Campo. It makes sense to hope for the best and plan for the
worst, but the truth is that people will always need a place to live, so
the residential sector will always recover.
Schall says a gradual increase in interest rates is not likely to have a
significant impact for several years.
Most of the REITs have very strong balance sheets and minimal
variable rate exposure and will easily be able to tolerate this
process, Schall observes. Its like surgery if we know its necessary,
lets get on with it.
Schall, too, is bullish on residential REITs going forward since the strong
fundamentals of economic growth, demographic tailwinds and
limited overall supply of new housing will continue to contribute to
another strong year in 2016.
Categories:Hotels/Lodging
Column/Department:Sector Spotlight

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