After banner year, REIT braces itself for slower growth in 2023
What a difference a year makes. After experiencing the best operating environment in its 30-year history, a noted real estate investment trust in now taking a wait-and-see posture as it relates to multifamily valuations.
Camden Property Trust officials laid bare the scenario during the real estate investment trust’s earnings call report on it fourth quarter 2022 performance. The REIT’s chairman and chief executive officer, Richard Campo, detailed the changing environment from that seen last year.
Bid-ask spread widening
“The bid-ask spread for multifamily assets is as wide as I can ever recall,” he told investors on Friday. “Sellers seem to be hoping for valuations to return to last year’s peak. Some sellers acknowledged a decline in valuations of 10% to 15%, but buyers point to a dramatically different macro backdrop now versus last year, and reckoned value should be lower.”
The result of the widening bid-ask gap is nothing short of standoff, Campo added: “The result is the current standoff that won’t be resolved until buyers and sellers adjust their views on valuation and meet somewhere in the middle,” he said. “Until then, we wait patiently.”
Campo said he and the REIT’s executive chairman and president, Keith Oden, have spent a considerable time “…debating the merits of waiting patiently versus making something happen now.” The name of the company is derived from the last names of both Campo and Oden, the founders of the REIT.
Macro changes come after banner years
Despite the changing macro market, the company has performed well given the lure of multifamily investment as the single-family sector cools, it was stated. “We exceeded the top end of our guidance and raised guidance every quarter,” Campo said. “Operating conditions over the last two years have never been better, driven by being in the right markets with the best product and having the best teams.”
He detailed reasons for the high demand: “Apartment demand was driven by an acceleration of in-migration to our markets that opened sooner after the pandemic and continue to be more business-friendly, driving outsized job opportunities. And a massive release of rental demand from people who were previously at home with their parents are doubled up as government stimulus added to their savings and subsequent buying power.”
The scenario took its toll on demand: “As a result, apartment supply could not keep up with increased demand,” Campo explained. “2023 will be a return to a more normal housing demand market. Consumers still have excess savings, and the job market remains strong. Despite rising rents, apartments remain more affordable than purchasing homes for many consumers in our markets given the rise in home prices and interest rates.”
Adopting a change in perspective
While 2023 isn’t shaping out to be a comparable to last year, Campo suggested looking at future performance from a different lens: “Most of us don’t like slowing revenue or negative second derivatives, but I think we need to put things into perspective,” he said. “Apartments are and will continue to be a great business. Consumers will always need a place to live and will choose high-quality, well-managed properties to live in. We are projecting 5.1% revenue growth for 2023. Absent coming off last year’s 11.2% record-breaking growth, our 2023 projected revenue growth would be the sixth highest growth rate achieved over the last 20 years for Camden.”
In keeping with company tradition each year, Oden assigned a letter grade to forecast conditions in the REIT’s markets while ranking those markets in order of their expected performance during 2023: “We currently grade our overall portfolio as an A-minus with a moderating outlook as compared to an A with a stable outlook last year,” he said.
For now, officials take comfort in past performance as the new year unfolds: “At this time last year, we anticipated 2022 same-property revenue growth of 8.75% at the midpoint of our guidance range,” Oden said. “Camden’s overall portfolio achieved same-property revenue growth of 11.2% for 2022, well ahead of our original expectations and marking a record level of same-property revenue growth for our company. While conditions are expected to moderate during 2023, our outlook calls for same-property revenue growth of 5.1% at the midpoint of our guidance range, which would mark another year of above-long-term average growth for our portfolio. We anticipate same-property revenue growth to be within the range of 4.1% to 6.1% this year for our portfolio, with most markets falling within that range.”