As of 8.17.2020, apartment REITs are down 23% for the year. This underperformance is surprising. While likely directionally correct, we believe the market has overreacted here. Reason Being:
Private market valuations for Class A apartments are not down 23% like their public peers.
At current valuations the apartment REITs are trading at implied 5-6% cap rates. Whereas equivalent private market deals are still pricing in the ~4% range. This spread is a compelling arbitrage opportunity for multifamily investors that want to put capital to work but keep coming in 27th place on Austin apartment auctions (aka marketed deals).
Though pandemic collections thus far are excellent (95-99%), the multifamily sector is not out of the woods until there is a viable vaccine. Reason being – nobody knows what collections look like a few months after unemployment benefits burn off.
The public markets are signaling a long-term impairment to apartment cash flows. Rent increases and occupancy will likely take a hit the next couple years. But will they drop enough to warrant a 23% decline in apartments value across the board?
Considering interest rates have also plummeted - enabling buyers to push prices - it seems unlikely that apartments in growth (positive net migration) markets will decline to this degree.