The next big apartment opportunity is forming

Over the last month or so, I've written quite a bit about homebuilders. This includes my friendly wager with fellow publisher Porter Stansberry.

After I lauded Toll Brothers (TOL) on X, he challenged me by saying that NVR Inc. (NVR) was a far superior choice. And so we agreed to a 10-year comparison to see which one comes out best.

The bet began on October 6 and, so far, I'm winning. Toll Brothers has gained 5.1% while NVR is up just 1.4%.

Then again, Berkshire Hathaway's (BRK-A)(BRK-B) pick, Lennar (LEN), is up 10.7%. So CEO Greb Able is clearly blowing both of us out of the water.

For the time being, anyway. This is a marathon, after all, not a sprint. Nobody ultimately knows where any of these companies will be a decade down the road.

What we do know is that, right now, homebuilders in general continue to face significant headwinds. Mortgage rates are depressing demand at the same time that inflation is making materials more costly.

That’s part of why I prefer Toll Brothers with its focus on luxury homebuyers. For everyone else, renting remains a compelling option.

Now, it’s true that residential real estate investment trusts – also known as apartment REITs – haven’t done so well this year compared to the larger equity REIT index. Sector-wide funds from operations (FFO) growth will likely decline 1.8% when everything is said and done.

But that’s because there’s too much supply out there. The shutdowns sparked massive moves to Sun Belt states, leading to a wave of new construction.

So much so that tenants now have the upper hand in choosing where they want to live – and the rent they’ll pay.

However, I believe we’re nearing a tipping point in these landlords’ favor. In which case, now is the time to act while their stocks remain depressed.

There are many publicly traded apartment REITs out there, including:

Some of these landlords operate in Sun Belt markets; others operate in coastal areas. And naturally, both have their pros and cons.

The Sun Belt boasts more population growth and corporate relocations. Though that’s led landlords to build too many new apartment complexes.

Coastal apartment REITs, meanwhile, enjoy higher development barriers, since there’s just less open land to work with. Yet the demand isn’t nearly so stable in many cases.

Personally, I’m more partial to Sun Belt rentals since I live in Spartanburg, South Carolina. And professionally, I've spent decades developing real estate throughout this region.

Greenville, down the road from me; North Carolina’s Charlotte and Raleigh; Atlanta, Georgia; Nashville, Tennessee; major Texas markets like Dallas, Austin, and Houston… They’ve all grown by leaps and bounds in recent years.

So I understand why landlords want to capitalize on them. I just don’t think they worked out the short-term numbers well enough in 2024 or 2025.

Longer-term, the demand is definitely there though – especially now that new supply is slowing down. According to Cushman & Wakefield, the Dallas-Fort Worth area absorbed more than 50,000 apartments from January through September.

For Austin, it was 34,000. And for Houston, 26,000.

We’re also seeing improvements in Nashville, where Q2 vacancies fell to 7.8% and trailing 12-month absorption exceeded deliveries by 11%.

That’s the kind of data I’m looking for: strong demand and weaker construction pipelines.

Just two months ago, AvalonBay Communities completed its merger with Equity Residential to create the aforementioned Vivmark Residential. The combined REIT is now one of America's largest publicly traded apartment landlords.

It also operates in both coastal markets and the Sun Belt, with apartment assets in:

With more than 184,000 units and a $70 billion enterprise value at closing, Vivmark has substantial scale. That allows it to reduce operating costs, strengthen its access to capital, and improve its assets.

Sure enough, management identified about $175 million in gross annual synergies right away. That comes out to $125 million net of expected real estate tax reassessments.

Recognizing this financial strength, S&P gave Vivmark an A credit rating.

This REIT has impressive earnings potential, too. Analyst firm Mizuho recently upgraded VMRK to Outperform on expectations of sector-leading FFO growth in the mid-4% range next year.

There’s evidence of operating momentum even while we’re still finishing up 2026. For instance, Vivmark reported 3.6% year-over-year asking rent growth last month, with 95.7% occupancy.

That's pretty good in this apartment environment. I’d go so far as to call it encouraging.

Of course, Vivmark still has merger-specific risks to work out such as integration costs and execution challenges. And there’s always the potential for unexpected expenses.

But I still believe it offers an intriguing array of scale, balance sheet strength, and earnings potential.

Nor is it alone in positioning itself for a turnaround… or combining operations. We also have to consider UDR, which recently raised its 2026 FFO growth outlook from -0.4% to 0.4%.

Management raised its same-store net operating income (NOI) growth guidance as well to 1%. And its blended leasing spreads hit about 2% this past quarter.

Then, just last week, UDR announced a $2 billion joint venture with Apollo. This entails it contributing 7,059 apartment units via 19 communities that it will continue to manage. And Apollo will put $1.34 billion into them for a two-thirds interest in these so far undisclosed locations.

The resulting portfolio should have a transaction-value capitalization rate of about 6%.

What I like so much about this venture – and I imagine UDR’s management does, too – is that it allows the REIT to recycle capital, reduce debt, and boost its future upside. And all without issuing more common equity that could dilute its balance sheet.

This isn’t to say I’m bullish on every single apartment REIT or every single market. I’m still seeing more potential in some places than others.

For instance, the latest iREIT/Hoya Capital research shows the continued divergence between coastal and Sun Belt landlords.

Coastal markets have traditionally offered greater earnings resilience. And even now, several Sun Belt REITs continue to struggle with supply pressures.

However, I’m not looking at how well any of them are doing now. I’m looking for tomorrow’s upside.

If Sun Belt supply moderates enough to allow rental growth to rise, we could see a meaningful earnings rebound. That’s why I have Vivmark high on my research list, along with three other apartment REITs:

My question with each one is whether its share price offers an attractive entry point or not. Once I’ve established quality, my buying decisions always come down to valuation.

I’m well aware that these REITs’ recoveries won’t be immediate. Or uniform. And there’s always the chance they won’t happen at all.

But most signs I’m seeing are pointing to a turnaround starting sometime next year nonetheless.

I’m still confident in Toll Brothers on the homebuilding side of the living-space equation. And I still maintain that we’ll see a larger housing recovery one of these days.

However, apartments are getting a lot more business for the foreseeable future. And they’ll no doubt stay in demand even after mortgage rates drop and life gets more affordable again.

So my goal right now is to find the landlords that can best turn all of that into worthwhile shareholder returns.

I’ll keep you updated as I do!

Happy SWAN investing,

Brad Thomas
Editor, Wide Moat Daily