Green shoots in challenged markets

While the nation’s apartment industry is flourishing, thanks to favorable demographics and economics, a couple of markets are causing some concern for multifamily owners and operators.


Washington, D.C., where most apartment REITs recently have experienced disappointing, albeit expected, results in occupancy and revenue, remains perhaps the most worrisome, although there are a few green shoots showing in the long-beleaguered market.

During apartment REIT UDR, Inc.’s Q4 2014 earnings call at the beginning of February, Sr. VP and Chief Operating Officer Jerry Davis reported that the lease-up of the company’s recently completed 322-unit, $132 million DelRay Tower in Alexandria, Va., just six miles south of the nation’s capital, remains challenged by the weak D.C. market.

The REIT saw negative same store revenue growth of 0.6 percent in Q4 in the nation’s capital city, which Davis believes was the bottom for that market.

“I’ve got early indications and I’ve actually seen my January numbers and they actually pop back into positive territory,” he said, adding that the company is seeing new lease rate growth in the B product that’s mostly outside the Beltway going positive.

Inside the Beltway, UDR’s new lease rate growth is still slightly negative and renewal growth in both Class A and B product types are in the three percent to 3.5 percent range.

“When I look at that 0.6 percent or so that I’ve realized in the month of January and I bifurcate it between Bs outside the Beltway, for the most part, and As inside the Beltway, the Bs outside the Beltway are probably coming in at about 2.5 percent positive and my As inside the Beltway are about negative 1.25 percent.

“But, we’re confident in its long-term prospects,” he said of UDR’s largest market, where the company, as of the end of the year, owned and operated 4,313 same-store units that make up 12.1 percent of UDR’s 35,672-unit same store nationwide apartment portfolio and contribute 13 percent of total NOI.

“We think it will accelerate slightly from where we came in last year,” Davis said in February. “And, we definitely feel the negative revenue growth that we put up in the fourth quarter was our bottom.”

And further proof of the REIT’s faith in the market is that UDR is actively looking for additional sites in D.C., according to Sr. VP of Asset Management Harry Alcock.

At year-end, UDR was offering concessions of two-plus months at DelRay Tower in its oversupplied submarket in order to hold rate and maintain leasing velocity to reach the REIT’s budgeted occupancy, which was up 0.2 percent to 97.1 percent from the previous year’s year-to-date occupancy of 96.9 percent.

“Of note, in a typical development project, one month concession through the lease-up period is fairly standard. When a submarket is seeing lease-ups offer less than one month, it normally indicates excess demand versus supply and vice versa, when lease-ups are offering more than one month,” Davis explained.

“We expect slightly better full-year revenue growth in 2015, above 1 percent, currently, as we will continue to benefit from our diverse exposure of 50 percent B assets and 50 percent A assets, located both inside and outside the Beltway,” he said.

A month later, during UDR’s presentation at Citi’s 2015 Global Property CEO Conference, Davis reported that the REIT’s Washington, D.C. portfolio was at a negative 4.7 percent last year in the first 50 days on lease rate growth and this year, it’s at a negative 0.7 percent 50 days into the year. “So there’s quite a bit of a pick-up there,” he said.

AvalonBay Communities

AvalonBay Communities, Inc. saw a decrease in rents in the Mid-Atlantic of 0.5 percent, a 0.3 percent reduction in occupancy and a 1.6 percent drop in NOI year-over-year in Q4 in the market that produced 16.1 percent of the apartment REIT’s overall NOI.

And, the apartment company that, as of the end of the year, owned a direct or indirect interest in 277 apartment communities that house 82,487 units expects its D.C. Metro portfolio, which consists of 13,692 units, to lag again in 2015.

The bi-coastal REIT owns six development rights for an estimated 1,929 apartments with a total capital cost of $509 million in the D.C. market. It recently completed development of the 531-unit, $110.6 million Avalon Mosaic in Fairfax, Va., about 17 miles from D.C. and is underway on the 384-unit, $109.8 million Avalon Falls Church in Falls Church, Va., a 10-minute drive from downtown D.C., which is scheduled for completion in Q1 2016.

The REIT also got underway on the $21.3 million redevelopment of the 842-unit Avalon at Arlington Square that has been part of the company’s portfolio since 2002. The redevelopment of the community that is located around five miles from D.C. is scheduled for completion in the second quarter of 2016.

Also in Q4, AvalonBay completed the $11 million redevelopment of the 558-unit Avalon Tysons Corner in Tysons Corner, Va., about 13 miles west of D.C., that started in Q1 2014. That community has been part of the company’s portfolio since 1997.

Sean Breslin, AvalonBay’s chief operating officer, said during the company’s Q4 earnings call that he expects the Mid-Atlantic to lag the rest of the company’s portfolio this year, “although an improved job picture there may help to form a bottom in 2015.”

Although Northern Virginia, Western Fairfax is still outperforming, the Rosslyn-Ballston corridor is soft and, as you go into suburban Maryland, North Bethesda, Rockville and Gaithersburg, it’s all pretty soft, although, going further out into Columbia, the market is performing a little bit better, he said.

In the company’s Q4 2014 management letter, CEO Tim Naughton and CFO Kevin O’Shea predicted that growing demand for apartments, enhanced by the Millennial-driven demographic trends. These include the 2-year increase over the past 2 decades of average age at first marriage and a mother’s average age at first birth, as well as the decline in the homeownership rate during this cycle. These trends and an expanding economy, will continue to stimulate new apartment supply.

“However, we believe demand will be sufficient to absorb the new supply in all of our regions in 2015, except for the Mid-Atlantic. In the Mid-Atlantic region, apartment deliveries in 2015 are projected to be about four percent of existing apartment stock,” they predicted.

Equity Residential

Washington, D.C., is Equity Residential’s biggest market, consisting of 18,652 units in 57 communities and contributing 18 percent of the apartment REIT’s actual NOI in Q4 2014.

The company, which owns and operates 109,225 units in 391 apartment communities in its coast-to-coast portfolio, saw positive results across most of its markets in the quarter, company executives reported in February. During a presentation at Citi Global’s CEO conference at the beginning of March, Equity Residential COO David Santee said, “We just teed off on a long par 5 and our drive was right down the fairway, but there are a lot of bunkers and tricky shots left, especially in D.C.”

With the market still at the tail end of leasing up the 19,000 units that were delivered in 2014, it is just in the beginning stages of leasing up another 13,000 units that will be delivered in 2015, he said.

“Job growth continues to be anemic in D.C., so we are not calling a bottom, but we are cautiously optimistic that D.C. will continue to weather the storm,” he said of the only market in the REIT’s portfolio to report year-over-year negative revenue, NOI and average rental rate growth in Q4.

Equity Residential saw revenues drop 0.1 percent in its 17,741-unit portfolio in the nation’s capital, while NOI decreased 2.4 percent and the average rental rate was 0.4 percent less than in Q4 2013. On the good news side, occupancy increased 0.3 percent, although this tied with South Florida for the smallest Q4 occupancy boost in the REIT’s apartment portfolio.

The metro has seen record absorption of apartments, in spite of D.C.’s anemic job growth during 2014, Santee reported during the REIT’s Q4 2014 earnings call at the beginning of February.

“Despite another 13,000 units to be delivered this year and the tail end of 2014 deliveries in various stages of lease-up, the metro remains very stable, with solid occupancy and good pricing discipline,” he said.

At the beginning of the year, Equity Residential completed the 360-unit, $112 million 1111 Belle Pre apartments on the historic site of the Belle Pre Bottle Factory in Alexandria, Va. The community which is located in the Braddock Road Metro neighborhood incudes one and two bedroom apartments that rent for $1,625 to $2,640 and feature hardwood flooring and open kitchens and an array of luxury amenities including a landscaped rooftop with pool and a resident lounge with multiple gaming options. It was 97 percent leased as of the end of Q4.

“The District itself continues to see outsized population growth and 25 percent of our District move-ins were folks moving closer in from Virginia and Maryland,” said Santee.

“With the budget deficit improving and many government retirees being replaced with younger workers with a higher propensity to rent and our positive year-over-year revenue growth that we see today, I’m not prepared to call a bottom, but it sure feels like we could be there.”

Assuming no change in direction, Santee said, Equity Residential execs are cautiously optimistic that D.C. could end the year flat to positive.

Camden Property Trust

“The Washington D.C. Metro will be our weakest market again this year,” predicted Camden Property Trust President Keith Oden during the company’s year-end earnings call.

In his annual apartment market grading exercise, he gave the market, where Camden owns 19 properties that house 6,405 apartment units, a C with a stable outlook.

Revenue growth was 0.9 percent in 2014, the lowest in the apartment REIT’s portfolio. Oden expects that to be a recurring theme in 2015, predicting that multifamily rental completions for this year in D.C., Camden’s largest market in terms of unit count, will be in the 12,000 range.

“However, most economists are predicting a better year on the job growth front, with estimates of 40,000 or more new jobs this year,” he said of the market where Camden finished the 321-unit NoMa I in 2014 and plans to start the second phase of that project—the 405-unit, $116 million NoMa II—this year.

Camden Chairman and CEO Ric Campo said the interesting thing in D.C. is that construction costs have moderated, making it possible to build NoMa’s second phase for a little bit less than the first. “NoMa I, for example, is yielding over 7 percent cash-on-cash return. Our NoMa II returns look like they’re going to be higher than NoMa I, so we like those kind of returns.

“When cap rates are sticky at sub-five percent and I can build to a 7.0 or 7.5 percent, I’m going to do it,” Campo said of the deal that is the best-yielding development in the REIT’s entire portfolio.

The oversupply issue in D.C. started during the economic downturn. Because of the then-benefit of government employment, D.C. didn’t have the job losses suffered by other markets in the country, “so D.C. started building,” he said during the March conference presentation.

“It was fast out of the recession with great rent growth to start with,” said Campo.

“Then what happened is the government started doing what it was doing—the sequestration and all the other things that we heard about—and job growth slowed and development got a little ahead of the demand.

“So, generally, the market has been a bounce-along-the-bottom, one percent up, one percent down kind of market,” he said.

However, he continued, today it’s possible to have great development spreads there and apartment community prices in D.C. have not changed at all, in spite of the view that the market will continue to bounce along the bottom for a while.

“I think, primarily, that’s a result of people believing long-term that the Mid-Atlantic is a great place to invest and, when you look at what a private buyer can buy at a 4.5 percent cap rate with a 2.5 percent interest rate, they still have positive leverage that is pretty robust and are able to make six to seven percent cash-on-cash returns,” said Campo.

He and Oden believe that concerns about the Texas market, with a focus on Houston, are exaggerating the risks caused by the recent drop in oil prices and don’t expect conditions in the market that houses Camden’s headquarters to decline in 2015.

“For the past four years, our Houston same-store revenue and NOI growth has averaged eight percent and nine percent, respectively. Over the past 20 years, those averages were 3.4 percent and four percent respectively. So, despite the ups and downs we’ve experienced during many cycles, Houston has consistently performed for Camden,” Oden said in his Q4 market review.

Houston, which is Camden’s second largest market with 8,434 units in 24 apartment communities, recently has seen a surge in supply, so revenue growth probably will be in the three to 3.5 percent range this year, Campo predicted during the March Citi Global CEO conference.

The market has added over 100,000 jobs in the last five years straight and Texas has added 50 percent of all the jobs in America since the downturn, he said. “So, it’s a vibrant market, primarily because of the low cost of business, pro-business activities, the low cost of operation, a highly educated workforce and low cost of housing,” he said.

But, in Houston right now, the same energy worries that precipitated a drop in the price of Camden’s stock have dried up the development capital stream there.

“If you don’t have your apartment financing completed, either equity or from a bank, you won’t get your deal done,” he cautioned.

“We think what’s going to happen is that supply will peak this year and early next year and then start trailing off and be substantially less in 2017 and ‘18,” said Campo. He added that Camden broke ground in Q4 on an apartment community there that will deliver in 2017—the 315-unit, $90 million Camden McGowen Station.

“We think that’s a pretty good time to deliver, when the rest of the development community cannot deliver by then,” he said.

However, despite the oil concerns, the challenge in Houston right now is that there really are no bargains. Land prices have come down a bit and there are plenty of bids for assets, so those prices haven’t changed at all, said Campo.

“We’re looking for land (in the Houston market) and for development deals that perhaps can’t get funded, but the question will be whether there are any bargains to get at this point and I don’t see any. But we’re keeping our eye out,” he said, adding that it remains a very active transaction market.

“There is nervousness and worry going on, but still plenty of capital willing to invest in Houston,” he said.