All about the “O”

Looking forward to robust occupancy levels and the opportunity to raise rents, apartment companies across the country are beefing up their development pipelines and acquisition budgets.

Las Vegas was named one of the country’s most empty cities with its bloated inventory of homes left over from the housing bubble. Sin City’s single-family vacancy rate of 5.5 percent at the end of last year—more than 7,000 empty homes in the city proper, according to Census estimates—was among the highest in the country. Rental properties were a little closer to the national average at 13.5 percent. Las Vegas is projected to edge forward the least in the rent 2011 boom.

At the beginning of the year, UDR CEO Tom Toomey predicted good things for the apartment industry. “We support the consensus view that the macro trends for our industry are some of the best many of us will see in our careers,” he said in February. “I think we will have the wind at our backs for 2011, 2012 and beyond,” he predicted.

Job growth, the key driver of the multifamily business, will fuel much of that success, he said. Industry pundits predict some two million new jobs will be added nationwide this year, which should support continued demand for rental housing, but the timing of that phenomenon remains elusive, Toomey said.

Homeownership, the second component of rental industry recovery, is going through an unprecedented demographic change. Those between the ages of 25 and 34, a cohort that is expected to increase over the next 10 years by approximately 13 percent, will deepen the renter pool.

“Those changes will benefit our business, as our customers continue to rent housing for an extended period of time versus investing in a home,” said UDR’s top executive, predicting that echo boomer reluctance to take on the responsibility of homeownership will benefit the apartment business, as will the comparatively low supply of new multifamily dwellings resulting from a lull in development when the economy went south.

Continuing the litany of good news, Toomey said the supply of new apartment homes is expected to be at a 50-year low. And, although the national development pipeline is starting to grow, he believes the majority of development activity is in low-barrier markets with deliveries in 2013 and beyond.

He warns of some dark clouds on the horizon that could negatively affect the business, including the volatility in the capital markets—specifically, interest rates. But, he doesn’t foresee an interest rate spike. “We remain cognizant that rates are likely to continue to increase and may also usher in a decline in consumer sentiment and impact our asset value,” said Toomey.

Other economic concerns include how state and local municipalities will manage their budget shortfalls. “We are witnessing a wide variety of alternatives across our markets,” he said, warning that increases in fuel costs, reminiscent of a couple of years ago, have the potential to negatively impact the overall economy.

UDR’s financial forecasters predict 2011 FFO growth of 12 percent for the 38-yearold REIT that, as of Dec. 31, 2011, owned or had an ownership position in 59,614 apartment units from coast to coast, including 1,170 under development, in a portfolio that has seen seven consecutive quarters of 95.5 percent occupancy.

“We finished the year strong, with Q4 same store NOI up 1.3 percent, same store occupancy up 20 basis points to 95.6 percent, with same store revenues up 1.7 percent over Q4 last year,” said UDR Sr. VP of Property Operations Jerry Davis.

Since Dec. 2009, market rents have increased 6.6 percent, or nearly $70 per unit, and 88 percent of UDR’s apartment communities have achieved market rent growth over the past 12 months, with double-digit growth in San Francisco, Nashville and Baltimore.

Equity Residential President and CEO David Neithercut also was cheered by strengthening apartment fundamentals. “We begin the year with 95 percent occupancy, little new supply and an improving economy that will produce growing demand for high-quality, well-located rental housing,” he reported in February.

With that rosy outlook, the REIT is buying what could be regarded as riskier deals than would be appealing in a shakier economy. “Late in the year, we bought some deals that we knew were going to need some significant rehab work,” he said. While not suggesting that the company won’t buy a stabilized asset sometime in the near future, EQR began to look elsewhere for opportunities to put its acquisition budget to work when more capital began to chase those properties.

That strategy led the company to buy assets like the 559-unit 425 Mass deal in D.C., a property that was totally vacant when the REIT acquired it a year ago, and the 694-unit Vantage Pointe in San Diego, which was about 20 percent occupied at the time of purchase.

“We think we can underwrite risk and manage those risks better than the average bear and, as a result, we are looking for things that might have a little bit more risk on them, so we can get our yields up, as long as they are appropriately risk-adjusted,” Neithercut said.

EQR saw improved fundamentals for the year. Compared to the same quarter in 2009, the REIT’s revenues increased 2.4 percent, expenses decreased 1.8 percent and NOI increased 5.4 percent in a 113,931-unit portfolio that spans the country, with primary target markets that include Boston, New York, Connecticut, New Jersey, Washington D.C., South Florida, Chicago, Seattle, San Francisco Bay Area and the Southern California markets—Los Angeles, Orange County and San Diego County.

In early February, AvalonBay Communities President Tim Naughton provided a similarly sanguine outlook. “I think everyone sees the same things we see in terms of favorable environment for new development right now,” he told analysts.

The REIT enjoyed a busy fourth quarter and a very active 2010. “Our decision to ramp up our investment activity was driven by our assessment this time last year that 2010 would be a year of transition for the economy, for apartment fundamentals and for our investment activity,” CEO Bryce Blair said.

As the homeownership rate declined, falling 70 basis points over the past year, apartment occupancy benefited from the creation of approximately 700,000 new renter households, roughly half of which are expected to end up in multifamily, as opposed to renting single-family homes, he explained.

As a result of the increase in demand for apartments, along with a continued decline in supply, the REIT’s operating results improved year-over-year, starting with a rental revenue decline of four percent in the first quarter of last year and ending the year with an increase of 2.5 percent in Q4 of this year, he said.

Moody’s projects a total of three million jobs will be added to the U.S. economy this year, equating to annual job growth of almost 2.5 percent, with a similar rate of growth projected in AvalonBay’s mostly coastal markets.

“Increasingly, economists are expecting that the rise in corporate profits and liquidity, combined with higher consumer confidence, and the extension of the Bush tax cuts, will result in higher levels of business investment and consumption, fueling economic growth and corporate hiring,” Naughton said.

Thanks to the promising improvement in fundamentals for rental housing over the next few years, AvalonBay’s development team will be busy. The REIT started seven redevelopments, completed more than $400 million in acquisitions and started $650 million of new development last year, an increase of 70 percent from company projections at the beginning of the year.

More than $600 million was added to the development pipeline last year and Blair anticipated adding more than $300 million more to the pipeline in Q1 2011, as AvalonBay completed the due diligence process on several new pursuits. As of last September, the REIT operated a portfolio of 179 apartment communities that include 52,490 units in 10 states and the District of Columbia.

Camden Property Trust execs were pleasantly surprised by ending the year down just 3.5 percent—just half of the drop of seven percent that was predicted at the beginning of 2010—with improvement in every quarter.

“We began 2010 with significant uncertainty on the job front and apartment markets overall, which disguised the improving fundamentals that gained momentum throughout the year,” CEO Ric Campo told analysts in early February.

Demand this year will continue to be driven by a lower homeownership rate, the increase of the baby boom population and the continued unbundling of hunkereddown roommates and young people who are living with their parents and really don’t want to, said Campo.

The REIT expects a five percent increase in same store net operating income in 2011, or an 850 basis point increase over 2010. Campo thinks 2011 will be a transition year for Camden, “where we will increase our acquisitions and development programs.”

“Our team is ready to play offense in what we believe will be one of the best operating environments for our business that we have seen in a very long time,” said the CEO of the company that, as of early February, owned interests in and operated 186 communities that include 63,316 apartments across the United States.

Author Peggy Shaw