“That has really been a big tailwind for the group,” said Steve Sakwa of ISI Group. “Low interest rates are a positive for REITs because they really offer investors an attractive yield alternative relative to Treasurys or fixed income and you have a growth characteristic to that dividend yield that will go up and increase versus kind of a fixed return over a period of time.”
Sakwa is still being conservative on his forecast, as are other analysts who still believe interest rates will rise and take a bite out of REIT returns.
“I think we are going to see a pullback,” said David Toti of Cantor Fitzgerald. “I think in the near term there’s some potential weakness, but our view at this level, real estate is fairly valued.”
Analysts had been concerned last year about the hottest REIT sector—multifamily rental apartment buildings.
They worried that thousands of new units under construction would overwhelm potential demand. The housing recovery surged in 2013, and the expectation was that it would continue apace this year; that didn’t happen, as investors moved out and demand from mortgage-dependent owner-occupants didn’t pick up the slack.
Rental demand is now stronger than ever and rents continue to rise. Apartment REITs are up about 25 percent as a group year to date.
Supply of new multifamily units is being absorbed by demand, and market fundamentals are expected to remain strong over the next two years, according to a recent report from Freddie Mac. Analysts there point to an estimated 3.9 million potential households that weren’t formed due to the Great Recession, with young adults accounting for close to 75 percent of those pent-up households.
They say that over the next decade, an estimated 440,000 multifamily units may be needed each year to meet the growing demand.
“Over the long run, we expect the demand for multifamily units to be stronger than pre-recession levels. As the economy improves, and most pent-up demand releases, demographic trends will be (disproportionately) favorable for the multifamily sector, due to the young adults comprising a large share of suppressed household formation,” said Steve Guggenmos, Freddie Mac senior director of multifamily investments and research, in the report.