San Francisco, NYC rent markets slowing: Jefferies

Published Wed, Jun 8 201611:04 AM EDT

Rent growth is slowing in major U.S. real estate markets, so investors should avoid apartment stocks, according to investment firm Jefferies. "Initial spring leasing season results have been disappointing in key coastal markets, with San Francisco and New York slowing, and DC as well as Boston remaining sluggish ... beginning to slow down due to supply and rent fatigue," Jefferies' Omotayo Okusanya wrote in a note to clients Wednesday. He added, "Apartment REITs are still trading at relatively lofty multiples versus their historical levels. We therefore see risk of multiple compression as fundamentals slow." As a result, Okusanya lowered his price targets and ratings to hold from buy for AvalonBay Communities , Equity Residential and Essex Property Trust . The new price targets for the real estate investment trusts are $188, $66 and $230, respectively. Okusanya's picks have a 10 percent one-year average return with a success rate of 67 percent, according to analyst ranking service TipRanks, placing him in the top 7 percent of all Wall Street analysts covering any industry. The analyst stated data from Axiometrics, an apartment data research firm, showed April revenue growth "slowed meaningfully" in Northern California and "remained weak" in the New York City region. Moreover, rent-to-income ratios for the San Francisco and Silicon Valley markets are near all-time highs, according to Jefferies' analysis. "The biggest negative impact from new supply in New York and San Francisco has been the ability to drive rents on new tenants. Our market analysis suggests supply will likely also begin to impact the ability to drive rents on current tenants as leases expire in second half 2016, resulting in higher turnover (which may negatively impact occupancy and drive up capex costs)," the report said. Apartment REIT same-store revenue growth slowed in San Francisco from 6.4 percent year over year in 2015 to 2.5 percent in April 2016, according to Axiometrics data. New York/Jersey City went from 2.3 percent in 2015 to 0.8 percent in April 2016. The analyst said there were pockets of strength however. "Given our view that coastal markets are set to see slowing growth, we once again prefer the South-East markets like Atlanta, Nashville and Raleigh given that strong job growth continues to drive healthy rent growth," wrote Okusanya. For that reason, Jefferies called Mid-America Apartments "attractive" in the report.

Guy Calaf | Bloomberg | Getty Images

Rent growth is slowing in major U.S. real estate markets, so investors should avoid apartment stocks, according to investment firm Jefferies.

"Initial spring leasing season results have been disappointing in key coastal markets, with San Francisco and New York slowing, and DC as well as Boston remaining sluggish ... beginning to slow down due to supply and rent fatigue," Jefferies' Omotayo Okusanya wrote in a note to clients Wednesday.

He added, "Apartment REITs are still trading at relatively lofty multiples versus their historical levels. We therefore see risk of multiple compression as fundamentals slow."

As a result, Okusanya lowered his price targets and ratings to hold from buy for AvalonBay Communities, Equity Residential and Essex Property Trust. The new price targets for the real estate investment trusts are $188, $66 and $230, respectively.

Okusanya's picks have a 10 percent one-year average return with a success rate of 67 percent, according to analyst ranking service TipRanks, placing him in the top 7 percent of all Wall Street analysts covering any industry.