Canaries in a Coalmine

Move-outs to single family homes and turnover rates are the canaries in the coal mine of the apartment industry.


Like the avian alarm systems that once warned miners of dangerous levels of methane and carbon monoxide, turnover and move-out trends are highly sensitive to changes in market atmosphere, so apartment REITs monitor them as closely as the miners watched their yellow-feathered life insurance policies.

REIT execs recently have reported that those indicators finally are beginning to respond to the subprime lending debacle and the corresponding foreclosures and tightening credit standards that are slowing single-family home sales and positively impacting the rental multifamily business.

“Historically, when the single-family housing industry suffers, the apartment industry prospers,” said UDR CEO Tom Toomey in May, when he reported that move-outs to home-ownership in Q1 had dipped to a four-year low of 16 percent, a pretty steep drop-off since the beginning of 2002, when around 24 percent of UDR’s departing residents said they were moving into homes of their own. Toomey also reported that the REIT’s annualized turnover dropped below 50 percent to 48.6 percent by the end of March, a significant improvement over the 69.2 percent annualized turnover rate the REIT saw in Q2 2003.

“We clearly watched the home building industry over-extend and make bad homeowners out of a lot of good renters and I think we’re going to get our share of those people coming back,” predicted Toomey.

Most apartment REITs reported a reduction in turnover in Q1 that was more than ordinarily would be expected during the traditional seasonal slowdown at the beginning of the year.

When asked by analysts at a National Association of Real Estate Investment Trusts (NAREIT) conference in June about the impact of the softening for-sale market on his business, AvalonBay CEO Bryce Blair said, “The first thing we’re seeing is that residents are staying with us longer. There’s virtually nothing that happens in the housing market, in particular the forsale market that doesn’t impact us,” he said, recalling the negative side of that impact in for-sale boom years from 2003 to mid-2005, when anybody who had any desire to purchase a home was doing that.

“We’re seeing the flip side of that today,” he said, citing recent data that indicates new home sales nationwide and the median price of those new homes both are down 10 percent year-over-year. “In a period when home sales are declining, people are going to sit back. They’re going to wait until prices have bottomed,” before exchanging their apartment keys for keys to homes of their own, he predicted in early June.

Move-outs to home ownership from AvalonBay’s apartments peaked a couple of years ago at 28 or 29 percent, an all-time high for the REIT. “Today, that number is about 23 to 24 percent, so it’s retreated back to really historical norms,” Blair said last month.

“The sense of urgency to buy homes that we had seen in 2003, 2004 and 2005, as the home-ownership rate went in this country from the low 60 percents to the high 60 percents, is not there,” Equity Residential CEO David Neithercut said last month, adding that EQR also is seeing some of the failed homeowners coming back as renters.

“Strangely enough, and this has been going on for years, move-outs to home purchases have stayed at 23 percent in our portfolio and we’ve monitored this through two different systems that we have had over the years. It’s amazingly consistent at around 23 percent,” EQR COO Gerald Spector said in early May.

In Q1, quarterly turnover in EQR’s 165,000-unit portfolio that spans the country was down about 40 basis points. “We’re about 13.5 percent, so we’re continuing to see our turnover come down over the last year and a half,” he said. In Q1 2003, EQR’s quarterly turnover rate was just a hair above 15 percent.

“We’re seeing fewer people that move out, but of those that do move out, we’re seeing a consistent percentage attributing that move-out to home purchase,” Neithercut said. With turn costs running in the range of around $650 per unit this year, he expects the decline in turnover will positively affect the company’s bottom line.

West Coast-focused BRE Properties is seeing a similar phenomenon. During the REI’s Q1 earnings call, COO Ed Lange told analysts he had seen little change in the relatively small percentage of move-outs to single-family homes among the renters of the nearly 25,000 apartments in California, Arizona and Washington the company owns, either wholly or in joint venture.

“Move-outs for home sales still remain very low in our coastal markets, and it is something around 15 percent. So, that really hasn’t changed. And, if anything, what we’re seeing is that people are hanging back a little longer, anticipating that home sales prices might dip in the next 12 months. So we’re actually seeing them hanging back in the rental pool and the average length of stay moving out a little bit,” he said.

Camden Property Trust CEO Ric Campo also reported a slowdown in the number of people moving out of the REIT’s 186-property, 64,191-unit portfolio that stretches from California, through the Sunbelt to Florida and up the East Coast to Washington, D.C.

“When subprime was at its peak, when people were doing no docs and saying, ‘Trust me when I tell you what my income is,’ and ‘We’ll give you a loan with 100 percent financing and adjustable rates,’ about 24 percent of our move-outs were people buying homes. Some of our managers, just anecdotally, were telling us that people who couldn’t make their rental payments were actually buying houses with no downs,” Campo recalled.

He said the percentage of move-outs to home-ownership was down to around 19 percent in early June, positively impacting Camden’s turnover numbers and reducing the need to pull more people in through the front door of the property to offset the people going out the back door to buy homes, he said, adding that the trend also provides a more stable business climate that requires less household formation and job growth to justify pushing rents.

“So, it’s definitely beneficial to the business from that perspective and we think it is going to continue that way,” said Campo, who believes the trend will persist partly because of the psychological impact that the increase in foreclosures has had on potential home-buyers’ rent-versus-own decision nationwide, with economics supporting the rental option.

And recent foreclosure predictions by the National Association of Home Builders support that prediction. According to an NAHB report on foreclosure study last spring by Christopher Cagan, director of research and analytics for First American CoreLogic, 1.1 million single-family home foreclosures are expected over the next six or seven years, representing 13 percent of the adjustable rate mortgages originated from 2004 to 2006.

“Eighteen months ago, if you didn’t own a home, you were foolish. And, if you rented, you were throwing money down the drain,” Campo said, explaining that the market is very different now, with people worrying about falling home prices and increasing interest rates as they observe the pain recent home buyers are experiencing, thanks to variable rate financings.

And, when you combine the slowdown in housing purchases with today’s demographics, the outlook for the future is even brighter, he said. In the 1990s, seven percent of the country’s population was between 25 and 35 years old. Today, that echo boomer demographic makes up 20 percent of the population and continues to grow, as the oldest of the baby boomers’ children turn 30 this year, with another 80 million or so coming up behind them.

“Those people in their mid-20s have a much higher propensity to rent than to buy, partly because they need to be more mobile. And the slowdown in housing has really impacted those folks because they’re the ones that don’t necessarily have great credit today. So those are our best customers and they’re not going to buy homes or condos at this point,” he said. And the higher credit standards that are the fallout of the subprime blow-up are more of a home purchase disincentive for renters of Class B apartments than for the residents of the approximately 49,000 apartments the AvalonBay owns and operates mostly on the East and West Coasts, Blair said.

“As the B’s are positively impacted, the rising tide in the B’s will certainly benefit the A’s,” he said.

And what about the problems of lease approval for those whose credit may have been damaged by a foreclosure? “We talked about that in the last couple of quarters, and the answer is yes. We’re not going to use a foreclosure to block someone from renting one of our units,” Lange said.

UDR Executive VP of Operations Martha Carlin said in May that the REIT’s credit standards had not changed and expressed concern that many of those homeowners turn home losers have run up a lot of credit in failed attempts to save their dream.

And, while some pundits, like Trammell Crow Residential President Ron Terwilliger, predict a “fairly ugly correction” in both the condo and single- family home sectors, Toomey has a more positive outlook.

“I think we’ve all seen cycles where the lending practices have gotten stretched a little bit and I think that’s what’s occurred. The good news is that it’s snapped back quickly. In other words, the controls are bringing people back into conformity. So, no, we’re not seeing a flood of residents coming back because they’ve lost their homes,” he said.

“What we’re finding is a lot of people are looking for exotic mortgages to hang onto those homes and they’re finding them readily available in the market. I’m not a doomsayer on the state of the single-family industry or that it’s going to have a negative impact to us. I think it’s an orderly fix that’s in,” Toomey predicted.

But, despite the mild controversy about the prospects for the beleaguered single-family home industry, the apartment execs were virtually unanimous in their prediction that their industry’s canary-like indicators will continue chirping cheerfully in the markets where their companies are mining for renters well into the foreseeable future.