The Enclave at Vista Ridge in Lewisville, TX, part of the Preferred Apartment Communities portfolio. Canaccord analysts give the REIT a

NEW YORK CITY—Immersion in the National Multifamily Housing Council's conference last week evidently didn't move the needle for Canaccord Genuity analysts as far as the apartment outlook is concerned. “We continue to be measured in our approach to the apartment REIT sector,” write analysts Michael Kodesch and Ryan Meliker. “As peak deliveries will hit the apartment sector in 2017, we believe being picky when it comes to choosing stocks based on market exposure is perhaps more relevant than ever.”

The construction boom could be tempered by both market forces and external events, according to Marcus & Millichap's newly issued Multifamily Forecast. Noting that even as developers bring a projected 371,000 units to the market this year, “in addition to disciplined construction lending, proposals of increased government infrastructure spending could elevate competition for construction materials and labor needed for multifamily construction.”

In other respects, though, the multifamily sector is still buoyed by macroeconomic tailwinds. Broadly speaking, Marcus & Millichap notes that economic performance this year could benefit from “the carryover of last year's momentum. The uncertainty regarding fiscal, trade and other policy goals not yet formulated by the incoming administration could generate a drag on economic growth in the first months of the Trump term.”

Marcus & Millichap sees vacancies rising markedly in many class A markets while topping out at an average of 4% nationally at year's end, and forecasts rent increases at an average of 3.8%, a pace consistent with the view of Canaccord's analysts. However, Kodesch and Meliker write that rent growth on a market-by-market basis “reads very differently across the country,” a theme that was sounded throughout the NMHC conference.

Among the key takeaways from the NMHC conference, Kodesch and Meliker note that 2016 urban market rent growth was “solid,” but proceeded at only half the pace of suburban markets. “Supply continued to funnel and deliver more into luxury properties within primary, urban locations,” they add.

“At this juncture, our preference is for Sunbelt markets (Atlanta, Las Vegas, Phoenix and Orlando, specifically), as most of the new supply is hitting primary coastal markets (New York and San Francisco, primarily),” write the Canaccord analysts. “In addition, we believe rent growth and strategies are most attractive in the value-add space, where pockets of opportunities to create value still exist.”

Kodesch and Meliker also note that they appreciate apartment REIT strategies that are “outside the norm.” In particular, they cite the “unique funding and investment strategies” favored by Atlanta-based Preferred Apartment Communities, and the value-add strategies that NexPoint Residential Trust applies to assets that were “acquired with rents at a material discount to market.” The Canaccord analysts maintain 'buy” ratings on both REITs, while on Apartment Investment and Management Co., Essex Property Trust and Monogram Residential Trust, they're sticking to “hold” ratings.

In terms of valuation, the Canaccord analysts note that while the sector's current NAV discount relative to the general REIT sector looks attractive from both a current and historical perspective, “the stocks screen more fairly” on consensus multiples for funds from operations.

“The traditional apartment sector is trading at 18.7x, which compares to the LRA of 18.2x,” write Kodesch and Meliker. “Furthermore, the sector presently trades at a 2.2x premium to the REIT sector average vs. a historical premium of 2.4x. As such, we believe the sector offers a balanced risk-reward investment opportunity at present.”

Several economic factors have resulted in net positives for the multifamily sector and prices in core markets are at an all-time high. But just how long can the market continue on this trajectory? Join us at RealShare Apartments East on Feb. 28 and March 1 for insights on succeeding in the right markets as well as navigating and finding opportunities in the more challenging ones. Learn more.

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'Measured' Outlook for Apartment REITs

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