Apartment-focused REITs could see an increase in their cost-of-capital advantage if Fannie Mae and Freddie Mac either continue to pull away from multifamily lending or exit entirely.

According to Green Street Advisors’ Commercial Property Price Index, the US property market’s asset values are currently 27% above their last peak. Apartment values have slowed over the past several years, and have only risen 1% in the same span of time. This has already contributed to flattened cap rates. Managing director Dave Bragg predicts that transaction activity may slow further over the next twelve months.

Putting things in context, Bragg said real estate looks fairly priced relative to investment-grade bonds and slightly cheap with regard to high-yield bonds. The public REIT market has historically been a good predictor of the direction of private-market asset values. While the REIT market isn’t always correct, its signal is most powerful at its extremes, and today at the sector level, we see great divergence in discounts to asset value.

Analyst Conor Wagner notes that apartment-focused REITs could see an increase in their cost-of-capital advantage if Fannie Mae and Freddie Mac pull away from multifamily lending or exit entirely. This, in turn, might lead REITs into greater participation in their given markets.

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