Time to Bail out of Apartments REITs?

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The apartments REITs invested in the west coast were negatively affected last week. Ten out of the fifteen apartments found themselves among the lowest performing REIT stocks. Essex Property Trust was the most affected with its stock falling by 6%. The episode was targeted towards a group of stocks as it happened in a week where most REIT boats have risen. Are investors going to bail out of apartments?

Investors have gotten worried about the Northern California real estate market as signs that the same growth rates will not remain. In a recent publication, Essex, which has heavily invested in the region, mentioned that Northern California’s growth rate has slowed down from Q1 figures. Revenue growth decreased from 9.1% (Q1) to 7.7 % (April/May), which was enough to set a brief selloff last Friday and yesterday.

Equity Residential, which has invested in both New York and San Francisco, announced last week that it had lowered its guidance for same property revenue growth. The company has noticed underperformance in its San Francisco portfolio. The company’s stocks fell by almost 6%, making it the second worst underperformer last week.

Multifamily have been darlings of the apartment markets especially on the west coast. San Francisco and Silicon Valley has caught investors’ attention for its higher average income and higher percentage of families earning six figures. High employment rate has also been a highlight, especially for millennials that are interested in paying off their school loans and delaying their plans to buy their first home right now.

Since both REITs (Essex and Equity Residential) have been in the chopping block, it is not shocking that they have had poor performance this year. What is stunning is that a stronger sentiment against multifamily has been forming. We believe that this is going to become more common as some subsectors (such as multifamily) have been overvalued.

Source: Equity Residential (NYSE: EQR), Essex Property Trust Inc. (NYSE:ESS)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

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