Rents are soaring and demand for apartments is historically high, but some developers and landlords are overestimating the strength of the U.S. apartment market — and paying for it in quarterly earnings.
Others are warning that the second half of this year will be even tougher.
Construction of new multifamily units has been robust over the past five years, far outpacing that of single-family homes, but most of the product is in pricey markets and pricier neighborhoods, not in areas where demand is highest. That is because the costs of land and construction rose.
"Any time the numbers will work, developers will build. That's what happened in San Francisco and New York. Land prices and construction costs went up so much, the only thing you could build was high-end apartments," said Alexander Goldfarb, senior REIT analyst with Sandler O'Neill, which currently has a hold rating on all the apartment REITs it covers.
That is precisely why Equity Residential missed expectations so badly in its second-quarter earnings and revised its outlook lower yet again. After exiting the Florida market, the bulk of its holdings are in San Francisco and the New York City area.