Landlords rule

The landlord-tenant relationship resembles a pendulum. Sometimes it swings in favor of the renter, sometimes the landlord. Lately, it's been the landlords' turn. And the good times for apartment owners and managers aren't expected to end any time soon, multifamily REIT executives agreed during recent earnings calls.


“We are riding a monster wave that has a long way to go before getting to shore,” said Camden Property Trust CEO Ric Campo in his introduction to the apartment REIT’s Q1 2012 conference call.

“Strong operating fundamentals continue to be driven by broad macro factors, pushing more consumers into rental markets. Sixty percent of the new jobs are going to our customers, people of 34 years and younger.

Homeownership rate continues to fall, while new home mortgages are harder for consumers to qualify for. New supply is not a threat through at least 2014. In spite of rising rental costs for our customers, their ability to pay higher rents has been consistently improving,” he said at the end of April.

Camden’s customers saw average household income increases of nearly 11 percent from the first quarter 2011 to the first quarter of this year, rising from an average of $62,400 to $69,200 over the course of the year. But, the percentage of rent to income for those who live in Camden’s apartments declined from 18.4 percent in the first quarter of 2011 to 18 percent a year later, despite significant lease rate increases.

“Historically, our customers have paid between 22 percent and 24 percent of their incomes for rent and we do not believe that the rental increase cycle has peaked,” said Campo, reporting that virtually every metric the multifamily REIT uses to monitor conditions at its apartment communities registered either very good or excellent in Q1.

For the first quarter, average rents on new leases across the Houston-based company’s 47,742 same-store apartments were up 3.1 percent and renewals were up eight percent. In March, new leases came in with a 6.3 percent increase and renewals averaged 8.4 percent more than the renter previously paid, reported Camden President Keith Oden.

“Revenue growth year-over-year was strong across 14 of our 15 reporting markets. We saw double-digit revenue increases in five of our 15 markets-Houston, Austin, Charlotte, Dallas and Denver.” he said. “The most amazing turnaround was here in Houston. In the first quarter of 2011, Houston same-store revenue declined by eight-tenths of a percent and, in this quarter, revenues were up 12 percent, approximately 1,300 basis points improvement over the year.”

The turnover rate at Camden’s properties was up roughly six percent on a year-over-year basis in Q1, much of which was attributable to the rent hikes, said Oden. “But, the flip-side of that was we had sufficient traffic to be able to do it,” he said, adding that he expects the REIT will continue with that strategy as long as the trade-off makes sense.

“Our annual turnover rate tends to run in the 47 percent to 50 percent range and we’re very comfortable with that range over the course of the year. So, the fact that we’re 48 for the quarter really doesn’t get on my radar screen very much in light of the fact that we were able to push rents and push occupancy,” he said.

Equity Residential saw some occupancy decline in key markets throughout the quarter as the REIT held to higher rates. “We believe that making a trade right now in our strong markets, trading some occupancy for holding those higher rates is actually a good strategy at this point in the cycle,” said Equity Residential EVP and President of Property Management Fred Tuomi.

However, as the leasing season begins he expected and has begun to see a recapture of occupancy at those higher rates, he said, emphasizing that the new residents of the 121,011 apartments in Equity Residential’s 427 communities that are located in 14 states, ranging from coast to coast, exhibited no reluctance in accepting the new rates. “So, we are seeing some turnover based on price push-back, but not on new leases coming in,” Tuomi said.

“Our rent-to-income ratio is still strong, credit is still strong. None of that has changed. So, there is an ample supply of people willing, ready and able to pay the new leases,” he said.

Equity Residential’s base rents through Q1 averaged about 6.5 percent over 2011 levels and renewals remained very strong, averaging 6.6 percent increases for the quarter and, in April, renewals were up 6.9.

Residents of Equity Residential’s apartments in San Francisco exhibited the most resistance to higher rents, he continued. “San Francisco has been a very hot market for quite some time now, for several quarters, with double-digit rent growth, so it shouldn’t be a surprise that that’s where we’re seeing the most push-back on pricing,” said Tuomi, explaining that 30 percent of residents leaving one of the 38 apartment communities in Equity Residential’s Bay Area portfolio in Q1 cited a recent increase in rent as their primary reason for moving out.

“So, we’re holding rates in San Francisco, at the expense of Q1 occupancy. We’re now filling April and May traffic at rates of 11 percent and 12 percent above last year and renewal increases that are steady at 10.5 percent for April.”

The Los Angeles market’s ongoing recovery, he said, is still a bit lumpy, constrained by local economic problems, particularly in the government sector. But job growth, although not apparent yet, is expected. Equity Residential’s base rents in the City of Angels are growing steadily at a rate of 5 to 6 percent, but, as with San Francisco, there has been some push-back from residents. “We are seeing some price sensitivity keeping occupancies below 95 percent by a touch, so far this year,” he said. In April, renewing residents were paying an increase of 5.5 percent.

In the couple of weeks before the company’s end-of-April earnings call Equity Residential saw very strong traffic and leasing momentum building in key markets like Boston, San Francisco, and Seattle’s downtown and East Side.

“So, our strategy is that we held rates, we took that vacancy in Q1 and now we’re going to refill through the leasing season at higher rates. We expect our average growth over last year of our base rents to be in the 5.5 percent range,” he predicted.

Around 18 percent of those moving out of AvalonBay’s apartments in Q1 cited rent increase or other financial issues as reasons for leaving. “The only big variances from that were Northern California, where it was in the upper 20 percent, moving out for rent increase, and the mid-Atlantic, where it was in the low teens,” AvalonBay CEO and President Tim Naughton said at the end of April. Renewal increases in the Mid-Atlantic for May and June average around five percent, he said.

The REIT has been able to refill the vacant units in a timely fashion, keeping occupancy healthy and stable. “Through the first quarter, our occupancy remained around 96 percent and early indications for April are it will stay in the same level. And, when you look at turnover and conversions and conversion percentages, we aren’t seeing anything that creates any alarms for us,” said Leo Horey, EVP and chief administrative officer of the multifamily REIT that, as of the end of March, owned or held an interest in 59,090 apartments in 199 multifamily communities located in 16 high-barrier markets in 10 states and the District of Columbia.

“Reasons for move-out related to financial is up over historical norms, but fortunately reasons for move-out related to home purchase are well below historical norms and that’s allowed us to keep our turnover constant,” he said.

Naughton said that resident incomes are back on the rise, after falling and then flattening during the recession. “Median household income is projected to increase by three percent to four percent in AvalonBay’s markets in 2012. Combined with rent-to-income ratios that are at or below long term averages, renters should have the capacity to pay higher rents over the next two to three years. In fact, Witten Advisers estimates that nationally apartment market rents will grow faster than their long-term trend by 150 basis points through 2014.

“During the quarter, year-over-year rental rate performance in our portfolio accelerated from Q4, reflecting the pickup in economic and job growth in late 2011 and early 2012. The average rent change improved by 100 to 150 basis points from Q4, averaging over 4.5 percent in Q1, with renewals up by six percent to 6.5 percent and new move-ins up by two percent to three percent,” Naughton said.

He expects those favorable trends to continue in the second quarter, with offers for renewal for the April to June period up by six percent to 6.5 percent and new move-ins in April expected to pay some four percent more than the departing tenants. The West Coast is expected to outperform, as AvalonBay’s offers for renewals are generally in the seven to eight percent range there, while offers on the East Coast are in the five percent to six percent range.

Horey added, “The good news is that last year, when you blended new move-ins and renewals for fourth quarter, that blended to around 3.5 percent or 3.6 percent. This year, that number is blending more to 4.5 percent. And, then, when you move into April, seeing new move-in rents step up four percent and that’s very positive. And, then, when you look for the quarter, the quarter is six percent to 6.5 percent on the renewals, but when we go out as far as July, it becomes north of seven percent.

“So, we feel pretty good about the patterns that we’re seeing. We feel pretty good about the forecast that we put out there on the revenue side and our ability to achieve it,” he said.

Execs at UDR saw effective rental rate increases on new leases at the 33,823 same store apartments the multifamily REIT operates across the country accelerate towards the end of the first quarter, while renewal lease rates remained steady, with an average increase of roughly seven percent. San Francisco, Boston and Dallas were the REIT’s best performing markets.

“During the first quarter, we built samestore occupancy to roughly 96 percent by the end of March. Since then, our occupancy has proven sticky and new lease rate growth has accelerated as we anticipated it would,” UDR Senior VP of Operations Jerry Davis said at the end of April.

Combined with the current loss-to-lease of four percent in the company’s portfolio, he is confident that there’s ample room to further push rents as the peak leasing season gets underway.

Through the majority of April, UDR’s new lease rates increased by 2.8 percent year-over-year and rates on renewals were up 6.7 percent. Renewal increases sent out for the second quarter average 6.5 percent to seven percent. And, although annualized turnover during the first quarter increased by 310 basis points year-over-year to 46 percent, the 40-year-old REIT is having no trouble leasing those vacated apartments to residents with better credit and higher incomes.

Across its coast-to-coast portfolio, UDR saw move-outs due to rent increase rise to about seven percent of the reasons for move-out in Q1, compared to about six percent last year. But, in Boston, the REIT saw move-outs due to rent hikes increase to 18 percent of the reasons for departure, compared to six percent last year.

“What’s really happening there is two years ago people were able to move in, because the peak to trough drop was so great they got a deal basically and they’ve been moving back out and going back down to B product instead of living in our A communities,” Davis explained.

UDR spent a good portion of Q1 firming up occupancy, which stood at 96.1 percent as of the end of April, putting the REIT in a good position to drive rents in the peak season.