NEW YORK CITY-After recently giving multifamily REITs a marketweight rating, analysts at Banc of America Securities have downgraded the sector to underweight. The reason, according to locally based BofA analyst Dustin Pizzo, is that current valuations are no longer taking into account the potential pitfalls, so there is a chance apartment REITs may give back the tremendous gains they’ve enjoyed so far this year.

With the anticipation of further economic weakness, Pizzo says the overall picture could get worse before it gets better. He expects property-level growth to remain healthy at between 2.75% and 3.25%. However, he recommends that “investors take profits in the group, particularly into any additional near-term positive momentum created by further covering by short sellers, as we believe a further slowdown will materialize in the second half of 2008 and first half of 2009.”

As the second quarter results came in, relates Pizzo, it became clear that landlords are focusing on building and maintaining occupancy to prepare themselves for a potential further downturn. Despite the declining homeownership rate–most recently at 67.8%– slow traffic, rising concessions and the continuing economic slowdown is putting extra pressure on landlords, who are increasingly finding it difficult to increase rents. In fact, in its July survey of multifamily REIT property managers–which polled 2,500 managers in the top 15 apartment markets in the country–BofA found that rent and occupancy levels remained relatively flat.

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