AVB - AvalonBay: Hard To See Alpha At This Valuation

2024-03-05 11:06:44 ET

Summary

• Apartments in Coastal markets have much better demand-supply dynamics than in the Sunbelt.
• As a result, rents are poised to grow and occupancy likely to remain solid.
• Unfortunately, at a 5.2% cap rate, the valuation already reflects the positive outlook, leaving little potential for alpha.

Dear readers,

A couple days ago I downgraded a Sunbelt apartment REIT Mid-America Apartment Communities ( MAA ) to a HOLD, because of severe expected oversupply in the region which is already pressuring occupancy and rents. I argued against investing even at an elevated 7.2% implied cap rate, because I expected rents to drop sharply over the next two years. And while rents will eventually rebound as supply plummets post-2025 and the excess supply gets absorbed, this won't happen overnight. As a result, I do expect to get a better entry point in most Sunbelt REITs at some point over the next two years....

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