Raymond James upgraded Essex Property Trust (NYSE:ESS) to Outperform and Equity Residential (NYSE:EQR) to Market Perform, citing strong year to date demand trends in several West Coast markets.
The upgrades come after the recent mid-quarter operating updates posted by several multifamily REITs during the March conference season.
Raymond James also downgraded AIR Communities (NYSE:AIRC) to Market Perform and NexPoint Residential (NYSE:NXRT) to Underperform, with the former primarily related to investor confusion over last year’s debt refinancing costs, and the latter tied to concerns that Sun Belt supply pressure.
The analysts at Raymond James also added NXRT’s FFO results could be under pressure well into 2025, due to “higher for longer” interest rate outlook.
Raymond James, however, maintained its Underweight sector recommendation on multifamily relative to other REIT property types, due to its continuing concerns over the daunting level of new supply deliveries expected through 2024, and valuations that still screen relatively expensive to the analysts.
“Fortunately, a remarkably resilient economy has led to stronger than expected household formation and multifamily demand this year, helping partially offset the surge of new supply growth,” the analysts added in a note.
“But the acceleration of new apartment deliveries from a record-high construction backlog continues and is not projected to peak until roughly mid-2024, according to most third-party construction pipeline projections.”
Raymond James also said ESS is the new sector favorite.
“One of the more surprising developments we’ve been watching unfold this year is a surprisingly robust recovery in rental demand in the West Coast tech hub,” the analysts said.
“Essex’s portfolio faces the lowest level of competitive new supply this year of any large-cap multifamily REIT. Moreover, we also believe Essex’s updated 2024 guidance is among the most conservative of its peers and stands to potentially offer steady upside surprises as the year progresses.”
