By Avi Salzman

Apartment-renters have been on a roller coaster since Covid.

Rents crashed in 2020 during lockdowns, then soared during the inflation scare of 2021 and 2022. More recently, a surge of new housing supply across the country has given renters new options and caused rents to flatten out again, helping renters but hurting the stocks of companies that own apartments. Average rents were up 2.6% in July on a year-over-year basis, a mild increase by recent standards, and were actually falling in several cities, including Denver and Phoenix, according to Zillow.

The reprieve may not last long.

Rents may soon climb higher, some analysts say. While a slew of new apartment towers has hit the market this year, construction is expected to slow next year. In 2026, the U.S. could see 49% fewer new units than in 2025, according to Morgan Stanley. With less supply coming on, and demand still strong, rents should start to rise again. If rates do rise, they could also lift the depressed stocks of real estate investment trusts that own apartments, like AvalonBay Communities, Equity Residential and Mid-America Apartment Communities. Those stocks have been drifting lower this year, and are all down by double-digits from this time a year ago.

As of last month, apartment REITs were trading at a 28% discount to the S&P 500 based on their expected earnings over the next 12 months, the largest discount since the financial crisis of 2008-09, according to Morgan Stanley. This past week, the stocks fell even more, following a report that President Donald Trump could declare a housing emergency. Under an emergency, the federal government could get more directly involved in the housing market, potentially boosting supply and driving home prices lower. Morgan Stanley analyst Adam Kramer doesn't expect that to happen.

"We think concerns of federal government-driven new supply are overblown, given the importance of state and local policy on housing," he wrote.

Kramer recently upgraded shares of AvalonBay, which owns about 100,000 apartments in 11 states and Washington, D.C., to Buy, with a $225 price target. The stock is trading around $195, with a 3.6% dividend yield. AvalonBay has a strong development pipeline that should drive earnings higher even as the overall rental market grows more gradually, Kramer says.

He also likes Mid-American, whose housing portfolio is largely centered in the Southeast, Mid-Atlantic and Southwest. The company's markets have the benefit of strong job growth and household formation, according to Kramer. He thinks shares could rise to $169 from a recent $144.

Piper Sandler analyst Alexander Goldfarb likes Equity Residential, whose properties in San Francisco have seen "surging" rent growth. He thinks shares can rise to $80 from a recent $65.

Write to Avi Salzman at avi.salzman@barrons.com

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September 05, 2025 10:33 ET (14:33 GMT)

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