Investment bank Jefferies has downgraded Mid-America Apartment Communities, the largest U.S. multifamily owner by number of units, to hold from buy, joining a handful of analysts who have lowered expectations for the real estate investment trust in recent weeks.
The Jefferies downgrade adds to similar advice issued by other financial institutions in the past quarter, including Bank of America, Piper Sandler and Mizuho. Tennessee-based MAA is also not the only REIT to be downgraded over that time. Other multifamily-focused REITs including Camden Property Trust and Equity Residential have been seen by some analysts as weaker.
Reasons for Piper Sandler's MAA downgrade stemmed largely from tougher-than-expected rent conditions, including estimates of subdued growth in prices. MAA didn't respond to email requests from CoStar News to comment over multiple days.
“The big takeaway is that people are no longer willing to pay up to rent an apartment,” Alexander Goldfarb, managing director and senior research analyst of REITs at Piper Sandler, told CoStar News. “Inflation is up 20 percent in three years, wages are only up 15 percent, something’s got to give. And people are saying 'Look, if it’s temporary housing, I don’t need to pay a big number for that, but if it’s to own a home, there aren’t a lot of homes available, so I have to pay up for whatever is available.'”
With roughly 556,000 units completed in the United States in 2023 — a 40-year high — and another 440,000 units in the pipeline for 2024, renters have an abundance of options to choose from, but those choices aren’t evenly distributed.
At the same time Piper Sandler downgraded MAA, it upgraded AvalonBay Communities, a Virginia-based REIT with properties largely in the Northeast and West Coast, Goldfarb said. Reasons for the upgrade included longer-term projects that cost less to build and are benefiting from higher rents. But CoStar analysts also see regional differences in supply as a contributing factor.
MAA’s portfolio is concentrated in the Southeast, Texas and parts of the southern Mountain West, markets that are experiencing some of the worst oversupply issues in the nation. That may make it difficult to maintain revenue and keep net operating income from declining further, according to Jay Lybik, national director of multifamily analytics at CoStar.
AvalonBay “on the other hand,” Lybik said, “has the bulk of its portfolio in markets in which supply/demand has remained closer to equilibrium and our current forecast shows rent growth in many of their markets exceeding their pre-pandemic five-year average.”
For its part, MAA sees more balance between supply and demand in the markets it operates than Wall Street analysts.
“The various metrics we measure related to demand remained strong,” Tim Argo, MAA’s chief strategy and analysis officer, said in the company’s third-quarter earnings call. “Employment markets remained stable with continued job growth across our Sun Belt markets. Net positive migration trends to our markets continue with move into our footprint well ahead of move-outs outside of our footprint and remain consistent with what we have seen in the last several quarters.”
Argo also cited diversity across its portfolio, including markets such as Savannah, Georgia; Charleston, South Carolina; Richmond, Virginia; Greenville, South Carolina; and Raleigh, North Carolina, that have been outperforming larger cities such as Phoenix and Austin, Texas, that are “awash in supply,” according to Goldfarb.