Five major U.S. cities have outsized influence on the performance of four of the top apartment real estate investment trusts in the market.

According to a report from Morningstar Credit Ratings, New York City, San Francisco, Washington D.C., Boston and Los Angeles make up 90% or more of AvalonBay and Equity Residential’s net operating income, 65% of UDR’s net operating income, and 80% of Essex Property Trust’s net operating income (Essex property only has holdings on the Pacific coast).

Morningstar predicts that new supply in these markets will put a little downward pressure on these REITs’ performance, but overall multifamily demand in the nation should keep them relatively strong.

“We expect multifamily REITs with greater exposure to the more challenging markets in and around New York City and Washington to see slower rent growth and possibly higher vacancies during the next year or two. Nonetheless, we do not anticipate any meaningful deterioration in their ability to generate solid net operating income and meet their financial obligations given meaningfully diverse regional portfolio distribution, historically solid balance sheets, and strong management teams,” the Morningstar report said.

Not everyone holds this outlook. Some investors see the impending softness in the big markets as a greater problem and say that the four big apartment REITs are riskier than mainstream thought acknowledges.

“Mispricing [sic] among multifamily REITs appears to be rampant at the moment with the higher multiple stocks corresponding to properties in locations that I view as more risky. Similarly, the companies with properties in high growth locations with strong fundamentals are trading toward the lower end of the FFO multiple spectrum. This mispricing [sic] provides investors the opportunity to buy strong fundamentals at a good value,” said Dane Bowler of 2nd Market Capital in a post on Seeking Alpha.

In any case, the consensus is that there will be some downward pressure on occupancy and rent growth. Whether it is a big problem or a small disturbance remains to be seen in the next few quarters.

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