If there’s one market that serves as a litmus test for the eight conventional apartment REITs, that metro is Washington D.C.

With the exception of California-focused Essex Property Trust and rust belt-based Associated Estates, everyone has a stake in the nation’s capital. And, on the surface, that should be bad news for the sector. With weaker-than-expected job growth and a glut of new supply, the nation’s capital is one of the weaker apartment markets in the county.

“There is more supply on the way,” says Dave Bragg, a managing director with research firm Green Street Advisors. “Job growth is weak relative to other markets but it’s encouraging that REIT results are still meeting expectations.”

Yet, as Bragg says, despite those tailwinds, five of the eight traditional apartment REITs outperformed expectations in the second quarter, driven by a strong leasing season.

“You saw a couple of firms raise their guidance and you generally had companies exceed expectations,” says Rod Petrik, real estate research analyst at Stifel Nicolaus and Co. “I think that there was a positive quarter.”

A "Second Wind"
There are two reasons executives in the apartment REIT world haven’t seen D.C. become a major drag on their results—solid job growth and stagnant moveouts to for-sale housing. These trends aren’t new, but they’ve remained consistent throughout the year.

“Apartment industry revenue growth for both public REITs and private companies has been better than expected, due primarily to much better than expected job growth,” says Dave Bragg, a managing director with research firm Green Street Advisors. “Job growth has been really strong into the second quarter. That has allowed for far easier absorption of new supply than we and many others expected."

Yet, while job growth often signals an increase in move-outs for home ownership, that hasn't been the case this year. The long-term REIT average of move-outs for home ownership is above 18 percent, according to Bragg. Last year, 14.4 percent of move-outs fell into this category, but this year that figure has fallen to 14 percent.

While acknowledging many renters want to own, Bragg attributes this slowdown to affordability questions on the for-sale side.

“There is pent-up demand. Households are delaying purchases for different reasons than they were delaying purchases in 2009, 2010, and 2011,” Bragg says. “A key reason is now affordability. Prices have increased so far and so fast that housing is far less affordable than it was a couple of years ago.”

These twin trends of job growth and sagging single-family demand manifested themselves in the second quarter, where seven of the 10 REITs outperformed expectations. One (Home Properties) was roughly in line with expectations, while Associated Estates and MAA were a little below expectations, according to Bragg.

But overall the apartment recovery still seems to have some legs.

“Apartments have done well,” says Alexander D. Goldfarb, managing director at Sandler O'Neill + Partners. “Coming off of second quarter calls, things seem pretty good. There’s a second wind.”