Why development matters
Residential REITs undertook various development and expansionary activities in order to maintain their leadership in the sector. Due to a demographic shift in the US to Class A cities where there is high job growth, these regions provide the best opportunity for residential REITs to maintain their rent growth.
The residential REITs are well placed in the six coastal region markets of Washington, DC, New York, Southern California, Boston, Seattle, and San Francisco. The top REITs beat out the competition in these regions with the help of developmental activities.
Development and disposition activities of EQR
During 2Q17, Equity Residential (EQR) constructed a consolidated apartment property in Seattle. The estimated cost of the project is $57 million, and the project consists of 136 apartments. The company also disposed of two apartment properties worth $219.1 million, which consisted of 600 apartment units.
Capital deployment activities of AVB during 2Q17
AvalonBay (AVB) invested $400 million for the new development of communities during 2Q17. It developed four communities with a total of 1,489 apartments located in Redmond, WA; Quincy, MA; Princeton, NJ; and Hunt Valley, MD. It also began the construction of communities at a projected cost of $244.3 million in Redmond, WA; Hingham, MA; Piscataway, NJ, consisting of a total of 873 apartments. AVB also disposed of assets worth $112.5 million.
Essex Property’s capital deployment strategies in 2Q17
Essex Property (ESS) started the construction of a multifamily development located in Anaheim, CA. As of 2Q17, ESS had funded $4.0 million of the total of $13 million of the project. As of July 24, 2017, ESS had two development communities in Pleasanton and San Jose in lease-up, consisting of 251 and 376 apartments, respectively.
Guidance for capital deployment in fiscal 2017
EQR expects to acquire assets worth $500 million during 2017. EQR intends to dispose of assets worth $500 million in fiscal 2017. The company, however, decreased its acquisition cap rate outlook from 75 basis points to 50 basis points for fiscal 2017.
AvalonBay has lowered its development starts outlook by $100 million compared to what was expected previously. ESS hasn’t provided any outlook about its development activities.
These REITs and Boston Properties (BXP) together make up almost 18% of the iShares Cohen & Steers (ICF) REIT ETF. The ETF with its diversified portfolio provides a cushion to investors from volatility.