Piper Sandler analyst Alexander Goldfarb downgraded Equity Residential ( NYSE: EQR ) to Underweight as the rising risk of recession will increase resistance to absolute rent levels, especially in coastal urban markets. EQR stock is edging down 0.3% in Wednesday midday trading.
In its review of apartment REIT markets and its coverage universe between 2000 and not, Piper Sandler found that "cheaper markets tended to catch up to rent-to-income levels of the coasts, while the latter were effectively flat," Goldfarb wrote in a note to clients. "This suggests that just because someone could afford to pay, doesn't mean they want to."
Rents have risen faster than incomes in the past two decades, he added, bringing the rent-to-income ratio to 25% in Q2 2022 from 21% in 2000.
He downgraded Equity Residential ( EQR ) because it showed the biggest premium to its markets, "which we think is a risk heading into a potential stagflation-style recession." Meanwhile, Overweight-rated Mid-America Apartment Communities ( MAA ) "shows the best on relative affordability."
Goldfarb's Underweight rating is more bearish than SA Quant rating's Hold rating on EQR and directly opposed to the average Wall Street rating of Buy
Check the SA stock screener for ideas in residential REIT stocks.
SA contributor Justin Purohit is more bullish on Equity Residential ( EQR ), citing the affluence of its renters
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Equity Residential downgraded to Underperform at Piper Sandler