Turning the corner

"The times, they are a-changing" could be the theme song for the first quarter of 2010, when multifamily companies across the country started seeing improvement in fundamentals.


“What a difference a year makes. And the way things are changing today, what a difference 90 days make,” Equity Residential CEO David Neithercut, said, during the company’s earnings call at the end of April, adding that the recession appears to be receding much more quickly than expected.

“One year ago, we were facing extremely serious headwinds in our business, with domestic and global recession in full swing. We had job losses of 500,000 per month with really no end in sight. And, we were rolling down our rents, on average, 10 percent to 11 percent,” he said.

Even so, the largest apartment REIT in the country ended last year with same-store revenues across its 130,000-unit nationwide portfolio down just 2.9 percent and, by early February, the REIT was experiencing improving occupancy and net effective new lease rates were beginning to turn positive, as were renewal rates across many markets, when seasonally one would expect the opposite.

“And through the first quarter, those trends have continued and we think they are even stronger today,” he said, listing 100-bps occupancy improvement to 95.3 percent from January through March and net effective new lease rates up 2.3 percent year-over-year and 4.6 percent since the beginning of the year.

And, in April, the difference between move-out rents and new lease rates averaged down only one percent, compared with a year earlier, when that delta was negative 10 percent. “And, not a single Equity Residential market in the country is renewing leases today for less than at least a one percent increase,” Neithercut reported.

“We expect to collect more revenue from same-store properties in April, May and June than we did in January, February and March and it will be the first time since mid-2008 that we’ve been able to do that,” he said.

Because this downturn didn’t include the dramatic drops in occupancy of the previous down cycle, when apartments companies were losing their residents to single-family home purchase at historic rates, Equity Residential was able to maintain occupancy, despite massive job loss, reducing rents to do so.

“And now, with the economic picture improving, the 90 percent of the workforce that has remained employed during the downturn is no longer concerned about losing their jobs, which is enabling us to increase rents nearly across the board,” he said.

“We’re still a long way from recovering all the reduction of rents that occurred during the downturn and it will take a while to get it all back. But we are encouraged by what we are seeing without any real job gains and are optimistic about the impact on fundamentals job growth will have, when it actually does return,” said Neithercut.

“Our first quarter results reflect a recovery in apartment market conditions that is occurring sooner than anticipated,” agreed AvalonBay Communities Chairman and CEO Bryce Blair, when the company’s operating results were announce at the end of April.

During the apartment REIT’s earnings call the next day, Blair reminded analysts that in his Q4 comments he said AvalonBay expected 2010 to be a year of transition in the economy, the employment situation and apartment fundamentals and portfolio performance.

“We had expected this transition to begin around mid-year. However, recent economic data, corporate profits and our first quarter results suggest that this transition is already underway,” he said, listing the evidence that a positive trend is gaining traction. As of March, the national job market began to show positive growth, but the recent improvement in apartment fundamentals is probably the result of a combination of factors, he said.

Job growth may be even stronger than the early spring reports indicate, particularly among the younger demographic — the age group most likely to rent. In addition, the consumer confidence index rose in April to its highest level since the beginning of the financial crisis in September 2008, Blair noted.

“I think it’s fair to say that most feel the worst is behind them and probably feel the job situation is likely stable,” which is particularly true in the younger age segments, he said. “Now, with the generally brighter outlook and the likely strained patience of their parents or roommates, the unbundling is likely beginning, as the typical 25-year-old recent college grad is deciding finally to leave mom and dad’s home or his friend’s couch and get his or her own apartment,” said the CEO.

Year-over-year revenue decline rates in AvalonBay’s portfolio peaked last October and the rate of decline has diminished every month since then, with a third of the REIT’s markets showing positive sequential revenue growth in Q1, usually a slow period of the year.

Renewal rates also turned positive during the first quarter and most of the company’s portfolio metrics have or were returning to pre-recession levels at the end of April.

“So, while the economic recovery this year will likely still be modest, at least in terms of job growth, it is a recovery and it’s taking hold earlier than originally anticipated,” said Blair.

Leo Horey, AvalonBay EVP of operations, carried on that optimistic theme, saying, “Year-over-year revenues declined less than expected and sequential revenue improved from the minus two percent reported in Q4 to minus 0.3 percent for Q1. Importantly, sequential revenue turned positive in March and early indications are that this pattern is continuing into April. This is the first sequential revenue increase since Q4 of 2008 and is occurring a couple of quarters ahead of our original expectations,” he said.

Occupancy increased through the quarter, reaching 96.5 percent in April, new move-in rent improved from about minus six percent in Q4 to around minus four percent in Q1 and was just over minus two percent in March, Horey reported. Also, turnover was at 42 percent, the lowest level in the past four years.

Renewal rates across the REIT’s mostly bi-coastal, 50,000-unit portfolio increased 0.5 percent in Q1, he said. “Our expectation is that these renewal rent increases will continue to accelerate in the second quarter. Given the upward momentum we are seeing in both the economy and the apartment market, our current operating strategy in most regions is to push rents more aggressively,” said Horey.

Camden Property Trust, which took a contrarian approach in the occupancy game, is seeing similar improvement in apartment fundamentals in the company’s 15 markets that are spread from coast-to-coast.

Camden allowed occupancy levels to fall in the third and fourth quarters of last year to position for the eventual recovery at higher rental rates, as opposed to having higher occupancy levels at lower rental rates. “Our strategy, at least in the early stages of the recovery, is paying off,” he said.

“Rent declines have moderated in all of our markets. New rents, compared to in-place rents were lower by 2.2 percent in April, compared to 10.4 percent last year. Markets, including the mid-Atlantic, Denver and South Florida, have seen increases in new rents versus in-place rents ranging from 4.7 percent to 1.1 percent,'” the apartment REIT’s CEO Ric Campo reported in May.

“In Phoenix, new rents are flat to existing rents, compared to a decline of over 13.6 percent a year ago. System-wide, new rents have increased 3.7 percent over the fourth quarter,” he said.

Rental rates are increasing along with occupancy, which, by early May was 93.9 percent across the REIT’s 63,000-unit portfolio, said Campo. “Current in-place rents are one percent higher than new rents. In December, they were 5.4 percent higher. Our average renewal rates were up 0.3 percent over existing rents for the first time since the beginning of the downturn.”

Camden President Keith Oden told analysts that the positive trends “point towards the first quarter of 2010 as a bottom for our overall portfolio.” In Q1, traffic was up by more than 24 percent from the fourth quarter and resident turnover rate fell to 44 percent.

“This represents one of the lowest quarterly turnover rates that we’ve ever seen and reflects the results of our aggressive resident renewal initiatives,” said Oden, adding that some of Camden’s community managers expressed concern about the strategy during the annual company awards ceremonies in each of the apartment REIT’s markets in February and March.

“During the Q&A with our community managers following the meetings, we were struck by the number of questions we got from our managers, who were fretting that our YieldStar pricing model may not be raising rents rapidly enough to keep up with improving market conditions,” he said, adding that a year ago, they were fretting that the pricing model might not be lowering rents rapidly enough.

There are two take-aways from that attitude turn-around, he said. “Number one, Camden’s community managers are seriously competitive Type A’s who will always be fretting about something and, number two, we may have reached an important inflection point,” Oden said.