12:33 PM EDT, 05/14/2024 (MT Newswires) -- Apartment real estate investment trusts have been the best performing REIT subsector so far this year thanks to improving new lease growth as well as takeout and technical factors, Morgan Stanley said in a note.

"With peak deliveries still to come, we wonder if the group, now trading at a premium, has gotten ahead of itself," Morgan Stanley said, suggesting investors to stay selective while preferring Coastal REITs.

New lease activity improved across the group, but year-to-date improvements were more significant for UDR (UDR), Equity Residential ( EQR ) and AvalonBay (AVB), Morgan Stanley said.

Apartments are currently receiving a record amount of new supply, with most prognosticators expecting a peak in deliveries in mid-'24, according to the report.

"We are still middle innings in the delivery and absorption cycle and we think there is a strong chance that fundamentals falter in the fall as demand declines (following the typical seasonal pattern) and record levels of deliveries need to get leased, which could lead to stock underperformance," Morgan Stanley said.

Morgan Stanley raised its price target on AvalonBay to $209 from $203 while keeping its overweight rating.

"Best in class FFO per share growth in each year, and growth that's much better than the REIT group avg, deserves a premium multiple," the report said, adding the stock isn't expensive relative to peers, given the better growth.

Price: 197.53, Change: +0.54, Percent Change: +0.27