November 9, 2011 - Housing news is terrible. While some regional pockets show signs of revival, most are stagnant with little new home construction and very little buying. Empty houses dot the landscape from Los Angeles to New York. Foreclosures are down but continuing. Banks own more homes than they want. People who bought homes they couldn't afford abandon them because their loan amount wiped out their equity in the new real world of home values.

Here are some interesting facts about apartments from an article by Mark Heschmeyer of Costar Group:

"It's an exciting time to be in this growing sector (multifamily units) where it is projected that $1 trillion in capital and 10 million additional apartment units are needed in the next 10 years as more individuals turn to apartment living," said Freddie Mac Multifamily Senior Vice President David Brickman.

Renters now make up more than 40 million households - about one-third of total U.S. households, according to Brickman. For every 1% that the current homeownership level of 66% decreases, one million individuals become renters.

The changing demographics also show a significant increase in immigrants, 20-34 year olds, and baby boomers entering the rental market. "The bottom line is that the multifamily market is poised for growth due to strong demand, healthy fundamentals, and limited supply," Brickman said. "These trends have renewed interest in the sector and investors are returning as evidenced by an increase in acquisition and refinancing activity."

Through the 12 months ending mid-2011, the Census Bureau reported a net increase of 1.4 million households that moved into rental housing, a 4% rise in the number of tenant households in just one year.

New construction starts of apartments in buildings with at least 20 dwellings have picked up this year and in the second quarter were the highest since the end of 2008.

Vacancy levels are firmly back to historical norms at an estimated 6.5% for the third quarter of 2011. Asking rents also likely rose again in the third quarter of 2011 by 1% quarter-over-quarter. It appears that full-year 2011 national average asking rent growth remains robust and on track to reach 4%, with effective rents perhaps reaching 5%, or even 6% annualized growth, according to Fannie Mae.

While the strength of declining vacancy levels and increasing rental rates will vary by metro area, on a national basis the multifamily sector should continue to see steady improvement for the remainder of the year, Fannie Mae said. It expects average asking rents to experience an annualized increase of 4% and the vacancy rate to stay fairly stable, perhaps declining to 6.25% by the end of the year.

(For the full article, see: http://www.costar.com/News/Article/The-Coming-Rental-Housing-Wave/133355?ref=100&iid=255&cid=6B48A5C3B1B3B0242B24E545F548F119 )

So how do individual investors take advantage of this trend? The easiest and best way is through stock REIT's that specialize in apartments or mutual funds that own mostly apartment REIT's. Some examples (these are given only as stocks that specialize in apartments, not as recommendations):
- Ambassador Apartments, Inc. (AAH)
- American Real Estate Investment Corp. (REA)
- AMLI Residential Properties Trust (AMVP)
- Associate Estates Realty Corp. (AEC)
- Avalon Properties, Inc. (AVN)
- Bay Apartment Communities (BYA)
- Berkshire Realty Company, Inc. (BRI)
- BRE Properties, Inc. (BRE)
For a full list of apartment stocks: http://www.inrealty.com/restocks/linmrt.html)

For a full list of REIT mutual funds: http://www.reit.com/IndividualInvestors/ListofREITFunds/MutualFunds.aspx

For a full list of REIT Exchange Traded Funds: http://www.reit.com/IndividualInvestors/ListofREITFunds/Exchange-TradedFunds.aspx

Previously investors needed to look through each REIT mutual fund's holdings to see what they owned. But now that's easily done with most fund screening programs or quotes for the fund showing its top ten holdings.

There are many stocks and funds from which to choose. So expect to spend some time finding the right REIT for your porfolio. But now is a good time to be invested in them because the trends for the next several years are working for the apartment markets. Many of these stocks and funds have outperformed the general market over the last several years. And there's good reason to believe that trend will continue.

Ted Allrich