Outlook for Multifamily REITs Stable for Now

New York–Out of the nine multifamily REITs rated by Moody’s, eight have stable outlooks and one has a negative outlook (Colonial Properties Trust). Meanwhile, the outlook for the sector is stable, according to the company’s REIT Outlook 2009 report. During the fourth quarter of 2008 and first quarter of 2009, the fundamentals of the apartment industry have steadily eroded and the forecast for rental demand is more uncertain. For now, landlords face little pressure from households choosing homeownership. “While home affordability measures are rising, they are offset by an aversion to buy assets that are still falling in value, stricter lending standards, and instability in the job market as well as the economy in general,” the report says.In response to the current state of the economy, multifamily REITs have increasingly adopted defensive postures with their balance sheets and operating activities, seeking to maximize liquidity through a number of initiatives, including the use of Fannie Mae and Freddie Mac debt, ratcheting down development activities, and asset sales. With little new supply and favorable demographic trends, we could see a relatively large population of renters looking for apartments in a supply-constrained environment once a recovery has taken hold in two-to-three years, according to Moody’s. According to Moody’s here are the strengths and weaknesses of for the multifamily sector currently.     Strengths:Moderate leverage and good fixed charge coverage Manageable near-term liquidity needs  Single-family tumult helping rental demand Very little new construction Demographics point to larger population of renters Fannie Mae and Freddie Mac access continues for nowChallenges Rapidly rising unemployment Shorter leases mean more immediate pressure on cash flow Leverage is among the highest of the major REIT sectors Margins lowest among the major REIT sectors Supply overhang from weak single-family and condo markets Financial markets limiting regular capital access (Graph courtesy of Moody’s)