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America is running short of apartments.
Apartment occupancy in the U.S. is at 96.5% and quickly approaching the all-time high of 96.8% that took place in 2000.
The strong demand for apartments is partly driven by millennials, many of whom are in no hurry to buy homes. The demand is driving rents in many markets much higher.
What’s attractive from an investment viewpoint is that in key markets, property companies can continue to build and expand apartment volume to meet demand while they can also raise rents. Now, nobody likes higher rent, but investors can benefit by investing in apartment real estate investment trusts (REITs).
These are real estate companies that buy, build and manage apartment complexes. And being REITs, they must pay out 90% of income as dividends. That’s why most offer hefty dividend yields that surpasses anything you’ll get in the S&P 500.
I talked about a few of the best apartment REITs back in 2015. Most notably, Apartment Investment and Management Co. (NYSE: AIV), which is up over 11% since then – while the S&P 500 has returned just 3% over the same period. Apartment Investment pays a 3% dividend yield.
But it is time to add two new names to the “must own” apartment REIT list. To start, we’ll turn to one of the best real estate investors around, Sam Zell.
Zell is the notable billionaire real estate investor, is known for investing in distressed assets – hence his nickname, the “Grave Dancer.” He has founded various REITs over the years, including Equity Residential (NYSE: EQR), where he still owns a sizable interest and serves as chairman.
With that in mind, here the top two apartment REITs to own today:
Top Apartment REITs: Equity Residential (NYSE: EQR)
Sam Zell’s Equity Residential is manager of multifamily housing, and a company that’s been around since the 1960s. Its dividend yield is a solid 3.3%, which is a hefty premium to the 2% that the S&P 500 is offering.
It focuses on the faster-growing urban markets where demand is still on the rise, including Southern California and San Francisco, as well as Boston, New York and Washington D.C. These markets are not only seeing above-average occupancy rates, but also have a higher portion of families making $100,000 or more.
I see a buying opportunity with Equity Residential, as shares are down near 52-week lows. The share price was eroded by an overblown fear that the REIT is becoming too niche; the company has sold off many of its suburban and second-tier market properties over the years to focus on the urban markets. However, that move should start paying big dividends for the company.
Top Apartment REITs: AvalonBay Communities (NYSE: AVB)
AvalonBay focuses on apartment complexes in the U.S.; it was founded in the late 1970s. Its focus is on some key real estate markets – namely California, Washington D.C., New York, Texas and Florida. Its also one of the biggest multifamily REITs around, with a market cap of over $23 billion.
But its dividend of 3.2% is also a major draw for investors. The real beauty of AvalonBay is that it’s focused on the millennial market. This includes its building of high-tech buildings that are fitted for being social and customizing space – specifically tailored to millennials. And millennials are an enticing market these days, having passed baby boomers last year as the largest generation.
Many consumers are still recovering from the financial crisis and buying a home just isn’t a top priority. That’s especially true for millennials. These top apartment REITs uniquely positioned to continue doing well. Equity Residential and AvalonBay are the two largest players in the industry and have a history of rewarding shareholders with dividends.