“It [EQR’s guidance] really set the tone for the rest of the REITs in the upcoming year,” says Conor Wagner, a research associate at Green Street Advisors. “We had been looking at declining revenue growth over the next couple of years. But at mid point [of EQR’s projection], they will be in line with 2014 growth. That was the biggest takeaway. The predicted slowdown for the group has not quite materialized.”
Though Wagner says no REIT offered specific guidance for the year ahead, the commentary was overall, very optimistic.
“No one else is ready to give a specific number yet but many of the REITs gave a very positive tone and indicated that they think 2015 will be similar to 2014,” he says.
But not everyone is as bullish on the sector beyond this year.
“They were one of the best sectors this year, but I’m not sure they’ll be the best next year,” says Ryan Meliker, managing director of equity research, REITs, and lodging for New York-based MLV & Co. “You have a lot of nice tailwinds driven by household demand, high consumer debt, and the millennial lack of interest in buying a home. But supply is growing rapidly.”
Though Meliker thinks there’s enough demand to absorb supply, he thinks growth will slow.
“Even if demand is absorbed, you’re essentially looking at slower NOI growth,” he says. “It isn’t the end of the world, there will still be growth.”
Headwinds and Tailwinds
One leading indicator for 2015 could be the fourth quarter of 2014. So, far occupancy has stayed strong as the sector enters December.
“While I think there is some expectation of a seasonal slowdown, I think most companies are pretty optimistic that they’re going into the fourth quarter with pretty high occupancy rates,” Petrik says.
Part of that high occupancy was a result of low turnover. Wagner was encouraged with REIT commentary saying turnover declined in the third quarter across the sector, despite job growth and additional supply.
“I wonder if it lines up with the secular shift of later marriages and later child birth,” he says. “We’ll be looking [in future quarters] to see if to stays low or if that [the turnover rate] was simply a blip.”
Others see slowing in Texas as well. “I think we'll have certain markets like Dallas and Boston that maybe decelerate a little more than the rest [of the country],” Petrik says. “But you’ll have markets like Southern California that will be picking up.”