As rent costs boom, evaluating the opportunity left in the hot REITs sector

Published Sat, Aug 14 20218:15 AM EDT

Residential rents are rising fast across the country, but Wall Street is torn on the best ways to still play this trend in the already hot REIT sector. The website Apartment List just released a survey showing a 10% jump in rents in the last year. On Wednesday, CNBC Real Estate reporter Diana Olick reported that in some parts of the country prospective renters are engaging in bidding wars. After a big run-up for many of the shares in the REIT sector, there is a wide range of opinion from Wall Street analysts on which stocks will perform the best moving forward. A down week has left a buying opportunity for some of the names, analysts said. Avalon Bay , Apartment Income REIT , American Homes 4 Rent and UDR all fell in the two percent range while Essex Property Trust fell just more than three percent. In the last year, three residential REITs rank in the top ten of the S & P Retail sector, Mid-America Apartment Communities up 59%, Equity Residential , up 49.6% and UDR up 48%. Investment firm BTIG hiked its target on Avalon Bay from $251 a share to $285 recently. That's almost 30% above where the stock stands today at $222 a share. Writing about the sector at-large, analyst James Sullivan told clients, "We expect strong demand to continue for several quarters and certainly into 2022." BTIG also believes "high current occupancy rates will allow owners to push rates." American Homes 4 Rent operates in 22 states and specializes in renting single family homes. The stock has jumped 36% so far this year but has dropped in the last few weeks, now hovering about 4 percent from the high it hit in late July. JPMorgan is bullish on the stock, with an overweight rating saying the company's "core trends are very strong as the single family rental business continues to be one of the best segments across the real estate landscape." Essex Property Trust is another REIT where Wall Street sees opportunity even after a run-up. It's up 32% so far this year, to $314. Morgan Stanley has a price of $344, about 10% above current levels. Analyst Richard Hill told clients anyone considering buying now should know there are risks. "Greater than expected delays in supply deliveries" could cause a sudden drop. The best performing residential REIT in the S & P Real Estate sector year to date is Mid-America Apartment Communities, up 47%. The company's apartments are mostly in the south and southwest. In this case Barclays believes the run may be done. The firm is underweight the stock and in a note to clients last week said "positive demographic and migration trends and positive rental rate growth" are already baked in. The firm is however bullish on another REIT, UDR saying it "benefits from diversification across property types, location and geography." UDR is up 38.5% so far in 2021.

Buildings in New York, on Monday, July 5, 2021.

Jeenah Moon | Bloomberg | Getty Images

Residential rents are rising fast across the country, but Wall Street is torn on the best ways to still play this trend in the already hot REIT sector.