A rush of economic reports released on the first day of the month painted a sluggish economic picture. Among them was a report which showed that June’s construction spending increased by the lowest margin in five months. However, homebuilding activity expanded for the third consecutive time.
Meanwhile, data released recently by the Commerce Department shows that the sector’s growth is being driven by apartment construction. In this scenario, investing in stocks of companies involved in apartment construction may be a prudent option.
Residential Construction Rises
Construction spending rose marginally, by 0.1% in June to $1,064.6 billion, witnessing its slowest growth since February. The rate of growth was also lower than the consensus estimate of a 0.7% rise. However, May’s growth rate was doubled to 1.8%.
However, outlays increased 12% compared to the same period last year. Additionally, construction spending increased 8% in the first half of 2015, compared to the same period last year. More significantly, the level of spending achieved in June is the highest in seven years.
Private construction, which makes at least 70% of the metric, declined 0.5% compared to May. Going deeper into this component, nonresidential building declined 1.3% month-over-month. However, outlays on residential construction increased 0.4% to $371.6 billion in June.
Apartment Building Activity Leads Growth
According to the Wall Street Journal, data released recently by the Commerce Department indicates that markets experiencing the fastest pace of growth this year derived half of their construction activity from multifamily residences. This conclusion was arrived at after taking into account the 10 U.S. markets experiencing the highest level of construction activity.
With 149.4% growth in the first half of the year, New York experienced the fastest pace of growth in the number of building permits. In the New York metro area, 90% of residential permits granted during 1H15 were for large multifamily properties. This is a considerably larger proportion compared to the same period last year, when such permits accounted for 71% of all those granted.
The second fastest growing market is the Los Angeles metro area where building permits have risen by 41.4% in 1H15. Of them, 72% were granted for multifamily projects. Miami and Seattle, the third and fourth fastest growing markets in terms of residential permits, follow a similar trend. While 69% of permits granted in Miami were for multifamily complexes, the percentage came in at 64% in Seattle. In all these cases, the ratios have increased substantiality compared to the levels hit in 2007, the zenith of the building boom of the 2000s.
Single Homebuilding Falling Behind?
This is beginning to affect single family home building in certain cases. For instance, the increase in permits for Houston declined to 2.4% in 1H15 compared to an 18.3% gain during the same period last year.
This is primarily because a slump in oil has hit the region’s economy badly. Job growth has declined to 1.9% over the last 12 months compared to 3.4% in the same period a year ago. Last Thursday, Ryland Group RYL said second quarter sales for Houston dropped 14% from the year-ago period.
Our Choices
Given the evidence, the surge of apartment building is expected to continue going forward. While the current trend may be in favor of properties targeted at rentals, the very young population would become potential home buyers in the future.
This suggests that gains for apartment buildings are likely to continue over the long term. Companies and real estate investment trusts (REITs) involved in apartment building are likely to benefit from this trend, making them good additions to your portfolio. Our selection is backed by growth and valuation metrics as well as good Zacks Rank.
Post Properties Inc. PPS is a self-administered and self-managed REIT which develops and operates upscale multifamily apartment communities in the U.S.
Post Properties holds a Zacks Rank #2 (Buy) and the projected earnings growth is 21.6%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 19.51.
Camden Property Trust CPT is an independent REIT that is engaged in the ownership, development, acquisition, management, marketing and disposition of multi-family apartment communities in the Southwest and Mountain regions of the U.S.
Apart from a Zacks Rank #2 (Buy), Camden Property Trust has expected earnings growth of 7.2%. It has a P/E (F1) of 17.77x.
Armada Hoffler Properties, Inc. AHH is a REIT engaged in developing, building, owning and managing office, retail and multifamily properties primarily in the U.S.
Apart from a Zacks Rank #2 (Buy), Armada Hoffler Properties has expected earnings growth of 9.9% for the current year. It has a P/E (F1) of 11.74x.
Equity Residential EQR is one of the leading, fully integrated, publicly traded multi-family REITs in the U.S. The company has a portfolio of high-quality apartment properties in some of the most desirable markets across the country.
Equity Residential holds a Zacks Rank #2 (Buy) and has expected earnings growth of 8% for the current year. It has a P/E (F1) of 21.86x.
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