UDR (NYSE:UDR) has been a significant underperformer over the past year as higher rates weighed on real estate valuations, and the rental market has cooled significantly. Still, shares have rallied more than 20% from their lows as long-term rates have declined. While the apartment market is likely nearing a bottom, UDR’s valuation and real estate mix leave it unlikely to be a top performer in the sector.
UDR operates about 60,000 apartments across 21 markets. As you can see below, it operates across several markets. It primarily owns apartments in legacy markets like New York, Boston, and California, though it has also built a meaningful presence in the faster-growth Sun Belt. Over the longer term, given migratory patterns, I am constructive on Sun Belt real estate plays; however, the near-term outlook is more muddled as this positive backdrop has led to significant new construction, increasing supply, and weighing on rents.
Indeed, as you can see below, rental inflation has slowed significantly from its post-COVID surge. According to ApartmentList, rents fell by 0.7% in 2023, though the median rent is still up $250 from three years ago. The national vacancy rate of 6.5% is up from its 2021 low of 3.9% and is now in-line with pre-COVID levels.
Interestingly, Boston and New York were two of the top ten performing cities in 2023 as some legacy cities that underperformed in the aftermath of COVID have recovered and caught up, aided in part by lower construction levels. Strengths in these markets are a benefit to UDR. As you can see below, the Northeast has been immune to the fall in rents over the past year while the Sun Belt and California have weakened. The Sun Belt has reversed outsized gains