The shift from owning to renting, limited supply and the ability to handle volatility have moved multifamily REITs to produce net operating income in the mid- to high-single-digit ranges, which is expected to continue as occupancy and rental rates rise, says David Toti, Managing Director and Group Head of REIT research at FBR Capital Markets.
“Despite the rising rent increases, we are not seeing occupancy numbers fall and move-out turnover is still dropping, which is highly counterintuitive,” Toti said. “The renter is still very tolerant of price increases and resistant to move, resistant to bear the transaction costs of moving.”
Toti rates AvalonBay Communities (AVB) an “outperform” stock in the multifamily real estate sector. The stock has been rated “outperform” since last year, and although the REIT is a consensus favorite, Toti says peer valuations do not include sizable contributions from the development pipeline.
“When we launched on the name in December, our thesis was this: By the end of 2011, we expected AvalonBay‘s development pipeline to be significantly larger, and expected that investors would increasingly ascribe higher value to the pipeline. Seven months into the year, that is pretty much how it has played out,” Toti said.
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