Earnings Season Insights

With Q3 2023 REIT earnings season in the rearview mirror, takeaways reveal an industry navigating choppy waters and bracing for headwinds. An evaluation of financial reports from the five largest multifamily REITs in terms of market capitalization (AvalonBay, Equity Residential, Mid-America Apartment Communities, Essex Property Trust and UDR Inc.) indicate that revenue growth is stalling, some expenses are on the rise and net operating incomes (NOIs) are being squeezed—especially compared with 2022.

Each quarter, publicly traded REITs provide guidance for their full-year expectations concerning same-store revenue, operating expenses and NOI growth. Weighted by market capitalization, 2023 projections for revenue and NOI growth came in lower in Q3 than in Q2 and are significantly below full-year 2022 results. Meanwhile, operating expense growth projections increased slightly over the quarter, but were fairly consistent with 2022’s results (see chart).

Public/Private REIT Guidance for 2023

Note: Guidance figures are based on the averages of five REITS (AvalonBay, Equity Residential, Mid-America Apartment Communities, Essex Property Trise and UDR Inc.) weighted by market capitalization.

The decrease in revenue growth projections to 5.70% in Q3 from 5.82% in Q2 reflects the sector’s recognition of increasing supply pressures and the resulting impact on rent growth and occupancy. The supply problem is more starkly illustrated when considering that same-store revenue growth in 2022 was 11.25%—nearly double the current 2023 projection.

Eric Bolton, CEO of Mid-America, articulated this challenge in the REIT’s quarterly earnings call: “During the quarter we did see a higher impact from new supply deliveries across several of our larger markets with the resulting impact showing up in pricing associated with new move-in residents. … The high volume of new deliveries in several markets will continue to weigh on rent growth associated with new resident move-ins for the next few quarters.” At Origin, we have been cognizant of this risk for several quarters and have planned accordingly.

The modest increase in operating expense growth projections, to 5.25% from 5.23%, suggests efficient cost management and may even be reflective of cooling inflation expectations when compared to 2022’s operating expense growth rate of 5.28%. Still, this belies the fact that certain expenses are growing meaningfully. Property taxes, maintenance and turnover costs were all highlighted as concerns in earnings calls, and ballooning insurance costs were a pain point cited by many executives. This increase in operating costs presents a significant challenge to net operating incomes, and in turn, asset valuations.

In response to these dynamics, REITs and multifamily operators are employing a variety of strategies. On the revenue front, operators are leveraging advanced data analytics and pricing software to optimize rental rates, ensuring competitiveness in a softening market. Often in today’s environment, these analytics point to a familiar conclusion: Drop rents and utilize concessions to get “heads in beds”—even for new construction projects. According to RealPage Chief Economist Jay Parsons, market asking rents for apartments in lease-up as of September 2023 were down 5.4% since peaking in August 2022 (including concessions, effective asking rents are down 6.9%).

We can also expect to see renewal rent increases curtailed over the coming year—and even renewal concessions, potentially, as owners strive to keep residents in place rather than incur vacancy and turnover costs just to re-lease a unit for a possibly lower rate. On the expense side of the equation, several of the REITs’ executives discussed initiatives to adopt new technologies and centralize operations, particularly for leasing and maintenance, to trim controllable expenses. On the insurance front, many operators are turning to strategies similar to those discussed by Origin’s Marc Turner in this article from July.

As of Q3, NOI growth in 2023 is projected at 5.93%, down from 6.14% as of Q2 and actual 2022 NOI growth of 14.23%. We are in the early stages of this challenging market: Supply pressures will continue into 2024 as new unit deliveries peak before easing in 2025 and 2026. Operators will be challenged to find ways to creatively grow revenue in spite of increasing competition and to manage expense growth without encouraging turnover or sacrificing the quality of the resident experience. To paraphrase the late Sam Zell in a quote that’s regained popularity since he coined it in 1993, multifamily owners are on the lookout for ways to “stay alive ’til ’25.”