Don’t worry, be happy

Will the recent uptick in home buying have a negative effect on the apartment industry? Executives at some of the nation's largest multifamily REITs agree that is an unlikely scenario. In fact, it might be a positive sign.

Camden’s newest development. This 276 unit project located across from National’s Park in Washington, D.C., will boast amazing views of the stadium, Anacosta River, and the Capitol for upper-level residents, as well as a rooftop pool and deck, below-grade parking for 250 vehicles, and ground-floor retail. Leasing is set to begin around the middle of 2013.

“We think that an improving single-family market is a good thing for the apartment markets and the economy as a whole,” Camden Property Trust CEO Ric Campo said at the beginning of November.

“Single-family and multifamily markets have done well at the same time during many economic cycles,” said Campo, who 30 years ago co-founded the company that today owns interests in and operates nearly 68,000 apartments in 200 apartment communities across the country with Keith Oden, its president and trust manager.

The economic expansion that began in 1994 and continued through 2002 is a good example of that solid coexistence, Campo said. During that eight-year period, the home ownership rate increased to 68 percent from 64 percent, creating more than four million new home owners, while multifamily construction averaged 250,000 per year.

Even though multifamily demographics were weak during that time, with the 18- to 30-year-old prime-renter-age cohort declining, Camden saw a 45 percent increase in net operating income (NOI) and the company’s stock price more than doubled.

The game-changer, he said, was the simultaneous creation of 23 million jobs.

“Single-family market improvements will help expand job growth and lead to a stronger business environment for all of us. It’s all about job growth and it always has been,” Campo said.

Tim Considine, chairman and CEO of Aimco, one of the country’s largest apartment REITs, with 344 communities that house around 250,000 residents nationwide and in Puerto Rico, expressed a similar opinion in mid-November during a panel discussion at REITWorld 2012, the annual convention conducted by the National Association of Real Estate Investment Trusts (NAREIT).

“A strong single-family recovery is good for job growth and multifamily. As it recovers, it can be an important boost for the economy,” he said.

At the beginning of October, an increase in home builder confidence was evident, with private residential construction up 16.1 percent for the year, reflecting the partial recovery of the housing market.

But, Daniel Fulton, president and CEO of Weyerhaeuser Company, a timber REIT with a home building division, told the NAREIT panel’s audience, “It’s hard for me to paint a picture of how a housing recovery is bad for apartments.”

Also agreeing that a housing recovery can be good for both the single-family and multifamily industries, he said he doesn’t see one as a threat to the other, adding that the country may actually be facing a housing shortage for potential home owners.

“There’s not a lot of single-family inventory to choose from,” he said. “Resale housing is down and new inventory is very low.”

And, Camden’s latest resident move-out numbers reflect that recent turn of events.

“During the quarter, move-outs to purchase homes actually fell from last quarter’s 12.6 percent (of residents leaving their Camden apartments) to 11.8 percent, breaking a string of three quarterly increases,” said Oden, adding that the number is still well below the company’s long-term average of 18 percent of departing residents moving to homes of their own.

And, while the move-out percentage bodes well for the future, the REIT’s executives reported even more good news about recent company success.

“We had the highest quarterly NOI growth in 20 years. We had double-digit NOI growth in nine of our 15 markets. We had the second best sequential revenue growth in our history, behind only the second quarter of last year,” Oden said.

And five of Camden’s markets posted better than three percent sequential revenue growth-4.6 percent for Charlotte, 3.3 percent in Denver and Atlanta and a somewhat surprising three percent in Washington DC, where many in the industry had expected less.

Camden saw year-over-year NOI increase of 10.7 percent for its 47,251-unit same-store portfolio, with revenues increasing 6.6 percent. On a sequential basis, Q3’s same property NOI increased 2.8 percent, compared to the second quarter of 2012, with revenues increasing 2.6 percent.

And, strong Q3 trends in leasing and renewals were similar to last year’s, with rents on new leases up 4.4 percent and renewal rates up 7.9 percent versus 3.9 percent and 8.5 percent increases in new lease rates and renewals, respectively, in Q3 2011.

November and December renewal rates are up around seven percent and, overall, rents at Camden’s apartments were 4.4 percent above prior peak rents in 2008 and Q3 occupancy rates averaged a very healthy 95.6 percent and stood at 95.3 percent in October, compared to 94.6 percent in October of last year.

Equity Residential CEO David Neithercut also believes that improvement in the single-family space is good for everyone. He is unconcerned about the impact increased home purchasing might have on the apartment REIT that was founded in 1969 by multifamily legend Sam Zell. Nor does Neithercut expect incremental new multifamily supply to meet demand from the apartment REIT’s target market-the 25- to 34-year-old Echo Boomers.

“We think their interest in buying a single-family home, while they may want to, they’ll act on that later,” he predicted during the company’s Q3 2012 earnings call in late October.

With average occupancy at apartment communities in the company’s portfolio of nearly 119,000 units running at 95.8 percent in Q3, Neithercut said, “We don’t think single-family homes are a huge threat to us.”

Fred Tuomi, Equity Residential’s executive VP and president of property management, agreed, saying, “Our customers renting in high-quality, urban-core buildings are showing very little desire to purchase a home. I think people are set and they’re not buying homes. They are staying put with this urban core, great assets, great walk score, where they want to live,” he said, adding, “They’re not buying homes because, if they were to buy a home today, they have to go way out to the ‘burbs.’ So, we’re seeing very good stability in our resident base and our retention.

“I would think that the majority of people that are going to be the first to jump and buy a home are probably those renting homes today, not living in apartments,” he predicted.

The company that, as of the end of September, owned and managed nearly 119,000 units in 418 apartment communities from coast to coast, saw move-outs due to home buying stay basically flat sequentially from Q2 to Q3, at 13 percent. That’s up just 110 basis points from the same quarter last year and still well below normal levels, Tuomi said.

“So, our customers renting in high-quality urban core buildings are showing very little desire to purchase a home,” he reported in late October.

And, Equity Residential’s solid occupancy numbers reflect the continued upward trajectory of the company’s fundamentals.

“We continue to see favorable fundamentals across our markets and this continued strong demand for rental housing produced same store revenue growth of 5.8 percent for the quarter,” Neithercut said in his Q3 conference call introductory comments.

The strength of that demand allowed the company to increase rents substantially, with the strongest base rent growth in Q3 coming from the Pacific Northwest. As of the last week in October, San Francisco base rents were up 10 percent year-over-year, Denver’s were up seven percent and the base rents in Seattle were up six percent year-over-year, Tuomi reported.

The average rental rate at Equity Residential’s 6,194 units in the Golden Gate City at quarter end was $2,018, in the company’s 9,582-unit Seattle/Tacoma portfolio, renters were paying an average of $1,465 and Denver residents’ rents averaged $1,212 across the company’s 7,973-unit Rocky Mountain portfolio.

And, Neithercut expressed confidence that same-store revenue increases for the full year 2012 will come in at 5.6 percent, representing two consecutive years of five-percent revenue growth or better, the first time in the company’s history that has ever happened.

He expects same-store revenue will grow four to five percent in 2013, which will continue a streak of some of the best operating performance in the company’s history.

AvalonBay Communities, Inc. and Neithercut also saw strong performance in the company’s operating portfolio and new communities coming online through new development in Q3, showing no signs of distress from move-outs to single-family homes or any other competition.

Although job growth across the company’s bi-coastal apartment portfolio was slower than expected, the company that was created in 1998 through the merger of Bay Communities on the West Coast and Avalon Properties on the East Coast continued to see healthy demand across the apartment REIT’s 205 properties that consisted of 60,101 apartments in nine states and the District of Columbia, as of Sept. 30.

And CEO Tim Naughton reported in late October that Q3 marked the fourth consecutive quarter of double-digit revenue growth and the sixth consecutive quarter of double-digit NOI growth in the REIT’s Northern California portfolio, with AvalonBay’s Seattle, New York and Boston apartment fundamentals all benefiting from hiring within the tech sector.

AvalonBay has seen five consecutive quarters of revenue growth of more than 5.5 percent and six consecutive quarters of NOI growth greater than seven percent in the company’s same-store portfolio, said Naughton.

Looking ahead, he said, “If forecasts for job growth in 2013 and ’14 materialize in the range of two million to three million, as expected, the resulting demand should continue to support healthy rental market conditions in most of our major markets.”

Demographics, he said, remain favorable, with the growth of the prime renting cohort running close to 800,000 annually.

“In addition, this cohort is even less likely to purchase a home today than they have been in the past, as their homeownership rate has declined 500 basis points since 2002 to around 42 percent,” he said.

Sean Breslin, AvalonBay’s executive vice president of investments and asset management, provided more color on the homeownership trends in the company’s markets. “Move-outs due to home purchase increased about 20 basis points from Q2 to roughly 15 percent (of all departing residents) and remained well below the long-term average of 20 percent.”

Looking to next year, Naughton said, “In terms of how 2013 will play out, I think it’s somewhat a question of what happens with homeownership rates and, frankly, the marginal propensity to rent for those incremental households that are created over the next year.”

He said he believes homeownership rates will trickle down a bit, which will be good for the multifamily sector.

“I think housing has bottomed out,” he said. Despite the marginal move-out increase Breslin mentioned, the homeownership rate in AvalonBay’s markets is still around 500 basis points lower than the long-term average.

“I suspect that we’ll see that drift up over time, as consumer confidence takes hold. That is all assuming an economy that stays on a moderate, slightly-better-than-2012 growth trajectory,” he said.

With the recent improvement in personal savings rates and little promise of substantial return from any alternative investments, “I think you will see some folks at the margin take those savings and become homeowners, as we move further into the cycle. But, I don’t know anybody that’s really anticipating a strong turnaround in home buying,” said Naughton.

Considering the amount of excess single-family inventory that’s already been absorbed and the reduction in capacity of the home builders, he expects that’s more likely to translate into increased home prices than volume.

Jerry Davis, SVP of operations at UDR, Inc., which owned or had an ownership position in 54,985 apartments from coast to coast, including 2,441 units under development, as of Sept. 30, said at the end of October that he believes increased housing demand will likely be driven by a stronger economy, which suggests better employment growth, both of which are key drivers for continued growth in multifamily demand.

UDR should be better protected against move-outs due to single-family home purchase than historically was the case because, over the past five to 10 years, the company has transitioned its portfolio into urban locations in coastal markets with low singlefamily home affordability, where the population has a higher propensity to rent.

And, while move-outs of UDR’s residents to homes of their own likely will increase in conjunction with the recovery of the singlefamily market, return to the excesses of the mid-2000s appears remote, Davis said.

In mid-November, Federal Reserve Chairman Ben Bernanke said that overly tight lending standards are keeping a lid on the improving single-family housing market, which he said is “far from being out of the woods.”

Even though the housing sector appears to be on the mend, Bernanke said the lending pendulum has swung too far the other way since the 2007 to 2009 bubble in the US housing market that was at the core of the subsequent financial collapse.

“It seems likely at this point that the pendulum has swung too far the other way and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes,” he said.