REIT Week: A Tale of Two Markets

By Teresa O’Dea Hein, Managing EditorNew York–Top executives of both AvalonBay Communities Inc. (and Camden Property Trust noted in their presentations at REIT (real estate investment trust) Week 2008 that this year’s multifamily activities have been, to paraphrase the title of Charles Dickens’ classic novel, “a tale of two markets” for them, with some metros posting even better-than-expected results while a few others have been underperforming. Given overall housing fundamentals, both company execs said they are optimistic going forward, and expect that rental units in their extensive development pipelines to be coming on line in 2010 will be just in time for healthier economic times, when reduced rental supply will be available due to reduced multifamily starts now. “We haven’t seen multifamily starts this low since 1982,” said Camden’s President & COO Keith Oden.“The big picture is incredibly positive for multifamily rental construction today, if you can get deals done, given that capital is scarce, and plan to deliver in 2010,” Oden added. During REIT Week, organized by the National Association of Real Estate Investment Trusts (NAREIT), about 110 REITs and listed real estate companies in all property sectors report their latest performance to audiences of investors and potential investors during concurrent presentations at midtown Manhattan’s illustrious Waldorf=Astoria hotel. “I think the worst of it is behind us in Phoenix and Las Vegas because the wave of subprime foreclosures was first felt there,” said Oden. Furthermore, he noted, “While rental growth is flat to slightly down in those markets, we’re still maintaining 95 percent occupancy.”Oden pointed out that the ratio of homeownership to rentals trended up four years ago from 67 percent to 71 percent, with each one percent shift in homeownership representing about a million households. “That’s an important trend at the macro level.”For 20 years, Camden has closely tracked the percentage of people moving out of its communities to purchase a single-family home. Last year, Oden reported, it was about 24 percent but in the first quarter of 2008, that number had fallen to 14 percent. “People are delaying the decision to buy a single-family home so that is more than sufficient to maintain occupancy, even in markets with an overhang of single-family homes,” he believes. The shadow inventory of unsold homes does not seem to be particularly impacting occupancy rates, Oden said, especially because much of that has been built on the periphery of metro areas and that is even less attractive now with increases in gas prices. He thinks that employment growth is a much bigger issue.Furthermore, AvalonBay’s Chairman & CEO Bryce Blair (pictured) reported that the REIT had acquired five parcels of land from condo developers who had decided not to go forward with their entitled projects. AvalonBay has more than $5 billion worth of apartments, in 17 developments, either in construction or in the planning stage. It is also active in purchasing value add properties, on which it is spending an average of $30,000 to $50,000 per apartment to reposition them. At the same time, AvalonBay is also selling some assets in properties where it owns several communities.In addition, Blair noted, they’re experiencing less competition from homebuilders for land, building materials, and personnel. “Net/net—the weak single-family housing market has benefited AvalonBay.”AvalonBay is currently leasing up nine rental communities, attracting rents that it had anticipated, with concessions moderating somewhat from the first quarter of 2008. The REIT reported that first-quarter traffic was up about 10 percent, with April and May posting numbers close to that.Both Oden and Blair noted that there are fewer institutional buyers in the marketplace today, but regional buyers are making a comeback. Smaller transactions are being more competitively bid, Bryce observed.And while each of these REITs have traditionally been unsecured borrowers, Oden and Blair noted that the increasingly attractive and historically high spreads between secured and unsecured financing has influenced them to utilize that approach on select instances.