Multifamily REITs Struggle, Buckle Under Pressure From High Supply

Smaller multifamily REITs are beginning to show signs of the strain settling in for the asset class as rent growth dipped into negative territory for the year.

Aimco and Elme are liquidating, selling the portfolios to return capital to shareholders rather than continue on, while Centerspace is evaluating its options in one of the most challenging operating environments for apartments in years.

“Because jobs are really tepid, you're not really getting a lot of new rents,” Piper Sandler Managing Director and Senior Research Analyst Alexander Goldfarb said. “Renewals are pretty good, but new rents are not. You layer that in with the inability to buy assets. So, you take those two things together and it's like, ‘OK, does it make sense that we should explore other options?’” 

These REITs’ decisions arrive at a moment of unusual tension in the rental market. Fighting against a current of record-high new unit delivery last year, landlords have noticed slowdowns in rent growth as new leases dry up in an uneasy job market.

Aimco and Centerspace did not respond to requests for comment. Elme directed Bisnow to various press releases when reached. The REITs are on the smaller side, with Elme carrying the highest market capitalization at just under $1.5B.

The biggest players in the sector with market caps over $10B, like UDR and MAA, reported negative rent growth for new leases and adjusted guidance down in their Q3 earnings.

Nationwide, total effective rent growth slipped to negative 0.1% in the third quarter, according to Newmark. The long-term average for rent growth since 2000 is 2.7%. 

The firm’s latest multifamily research report projects stronger performance in the fourth quarter but noted net positive absorption for apartments reached just under 42,500 units in the third quarter, a significant slowdown from roughly 145,000 units absorbed in each of the last five quarters. 

Those dynamics played directly into Elme Communities’ decision to dissolve just four years after pivoting from office and retail into multifamily. After reviewing strategic alternatives, Elme opted to sell two-thirds of its portfolio to Cortland for $1.6B and put the rest of its holdings on the market.

The company told shareholders it ultimately believed liquidation would return more value than staying public as operating and capital conditions remained strained.

Private buyers have become a major force behind these exits. Several other REITs that sold this year, including the industrial REIT Plymouth, were acquired by nontraditional investors, expanding the buyer pool beyond the large institutional names that historically dominated public-to-private takeovers. 

“These were bought by private capital. And that's a dynamic that six-plus months ago, the buyer base for the REITs traditionally would have been the big Blackstones in the world, the Brookfields, the big traditional asset managers like that," Goldfarb said.

Alternative managers, hedge funds and others with large pools of capital are searching for higher-yielding assets, he said.

A shift in the buyer pool helps explain why liquidation and portfolio sales have become viable paths for REITs facing weak public valuations. Depressed share prices have made it harder for smaller public landlords to grow.

Private markets are far more receptive. That demand is giving REITs like Elme and Aimco clear exit routes and is a key reason Centerspace is exploring its options, according to analysts.

JPMorgan Chase analyst Anthony Paolone wrote in an analyst note that while pricing “wasn’t as strong as we hoped,” Elme’s board “ran a good process to try to maximize value,” adding that the company realized it “was going to have a difficult time achieving an attractive cost of capital in the public markets and was better off taking the money today for shareholders.”

Aimco reached a similar conclusion years after spinning off a $10B collection of its stabilized properties into a separate company in 2020, leaving about $1.3B worth of properties in its portfolio. 

After a wide-ranging review that involved more than 100 potential counterparties, Aimco is asking shareholders to approve a plan to wind down operations and sell all remaining assets. 

The company detailed declining net operating income, rising expenses and softening occupancy, reinforcing the pressure smaller public platforms are facing as new supply keeps rent growth in check.

"Having thoroughly explored various strategic alternatives with these counterparties, the Board unanimously concluded that the voluntary and orderly liquidation of the Company's remaining assets is most likely to result in the greatest value for shareholders as compared to other alternatives," Pat Gibson, the chair of Aimco’s investment committee, said in a statement announcing the liquidation last week. 

Centerspace, meanwhile, is earlier in the process. The REIT launched a strategic review after lowering earnings guidance for next year, citing the same revenue pressures and operating headwinds confronting the broader sector. Its board is evaluating a full range of options — including a sale or merger — and has not ruled out remaining independent, though it noted that no timeline has been set.

“Right now, you have a situation, especially for smaller-cap REITs, where they're creating attractive yields. And for private buyers, especially the alternative asset managers, who can borrow cheaper than where the REITs are trading on a yield basis, they become interesting targets,” Goldfarb said.

Underlying all three cases is a market where demand is resilient but not strong enough to fully offset the effects of high supply and still-elevated expenses. 

And while renter household formation has been buoyed by high borrowing costs, falling mortgage rates — now 6.19%, down from 6.54% a year ago — are beginning to draw some renters into the for-sale market. Home sales increased by 1.7% annually in October after a particularly strong September in which sales rose 4.1%, according to the National Association of Realtors. 

At the same time, new multifamily construction is beginning to slow. Unit starts fell to 234,000, a decrease of 43.2% over the last two years. Units under construction fell by about 50% in the same period, according to Newmark. 

What’s playing out at Aimco, Centerspace and Elme doesn’t meaningfully shift takeout odds for the bigger apartment REITs. Still, if peers continue to take deep net asset value discounts instead of selling assets or returning capital, the door opens wider for activists or privatization pushes, Green Street wrote in a research note. 

“All three companies lacked scale and/or an operating edge to engender a cost of capital that would allow it to succeed in the public market,” Green Street said. 

Despite the recent choppy waters, most companies will likely stick it out and weather the storm. 

“Multifamily, even though it's having some rough times right now because, you know, new rents aren't great, it's still a very desirable asset class because everyone needs a place to live,” Goldfarb said.