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Morningstar | Equity Residential Will Have to Rely on Internal Growth as Development Pipeline Shrinks

Equity Residential has repositioned its portfolio over the past decade to focus on owning and operating high-quality multifamily buildings in urban, coastal markets with demographics that allow the company to maintain high occupancies and drive strong rent growth. The company has sold out of inland and southern markets and increased its operations in high-growth core markets: Los Angeles, San Diego, San Francisco, Washington, D.C., New York, Boston, and Seattle. These markets exhibit traits that create demand for apartments like job growth, income growth, decreasing homeownership rates, high relative cost of single-family housing, and attractive urban centers that draw younger people. The company regularly recycles capital by selling noncore assets or exiting markets and using the proceeds for its development pipeline or acquisitions with strong growth prospects, a strategy that has produced strong returns.While Equity Residential has repositioned its portfolio into markets with strong demand drivers, we are cautious with the company's growth prospects, given that many markets are seeing high or rising supply, particularly the East Coast. The urban, luxury end of the apartment market where Equity Residential traditionally operates is seeing the highest amount of new supply and directly competes with EQR's portfolio. We think this elevated volume of near-term deliveries, in addition to the likely development of more-affordable suburban apartments and single-family homes, will continue to pressure market rents and will offset much of the demand growth created by positive demographic trends. Equity Residential has created significant shareholder value through development, but the increased competition for apartment assets combined with increasing construction costs is making accretive deals more difficult to find and underwrite. As a result, Equity Residential's development pipeline is now under $400 million. We do expect management to continue its patient and prudent capital stewardship, but high supply is limiting the ability to realize internal and external growth above the long-term trend.