RENT CONTROL Apartment firms have been taking advantage of a strong rental pool long before this year’s sub-prime meltdown. In 2006, multifamily properties in many markets dramatically raised rents due to a strong supply and demand equation. Many areas have seen their supply of rental units diminish due to limited apartment construction and the loss of apartments that were converted to condos. At the same time, there has been an increased demand for rental living.
Given such factors, it’s not surprising that rents on average jumped 6 percent to 8 percent nationally last year, with certain markets seeing double-digit growth. The most shocking example: South Florida, where rents for 100-plus unit projects skyrocketed by a whopping 13.6 percent, according to McCabe Research and Consulting.
Other big coastal markets including Southern California, Washington, D.C., and Manhattan also maintained high rents last year which helped REITS in particular achieve strong revenue growth. In fact, Camden’s same-property revenue growth was 7.4 percent for 2006, an all time-high for the company. “’06 was one of the best years we’ve had in 10 years,” says Campo. Interestingly, these dramatic rent increases did pose a major management challenge for the company, which pushed rents so hard that Camden’s resident turnover rate jumped from 64 percent to 75 percent. As a result, the site staff had to turn over an extra 7,000 units last year. “Even though revenues went up dramatically to pay for those turn costs, our people had to do a whole lot more work,” says Campo. “It was a real challenge to get units turned properly during that uptick.”
Such rent increases, however, are expected to fade in ’07, especially as more rental product comes back to the market through the shadow market of investors renting out their unsold condo units. “We will see pretty moderate increases in rental rates, but it won’t be anything like last year,” says McCabe, noting that rents in South Florida are expected to increase by only 4 or 5 percent. Case in point: Riverstone, a Rockville, based property management firm, is expecting a 3 percent to 5 percent increase across its national portfolio, compared to its previous 7 percent to 8 percent spike in various markets. The company recently acquired Woodland Hills, Calif.-based Stratus Real Estate, growing its portfolio to 120,000 units.
BACK ON THE GROUND Apartment firms, while they have certainly benefited from the tight rental supply, are now itching for the chance to break ground on new projects. And that opportunity has finally arrived, thanks to significantly less competition for land as condo builders have exited the market. “Land is much more competitive now for apartment developers, whereas a few years ago it was out of sight,” says Fred Tuomi, executive vice president and president of property management for Chicago-based Equity Residential. “We would bid a certain price, and a condo or for-sale user for that land could bid double or sometimes up to the three times as much. At least we now have an opportunity to compete acquire these sites, whereas the last 24 months a lot of sites just weren’t even possible.”
At the same time, land prices remain high. That hurdle, combined with elevated building materials costs, continue to make it extremely difficult to get shovels in the ground. (Fortunately, prices for commodities such as dry-wall and lumber have fallen due to the dramatic drop in single-family starts.)
In addition to land opportunities, apartment firms are also taking advantage of failed or aborted condo deals, be it land originally zoned as for-sale or condos that are in various stages of development or even completed. While Picerne isn’t actively pursuing these deals, the company is in escrow on a Las Vegas project that was originally slated as condos. Other MFE Top 50 firms also are scouting for land with condo entitlements that can be switched to rental housing. “We can shorten the cycle a little bit if we can buy land that’s owned, entitled, and ready to go,” says Greg Mutz, CEO of Chicago-based AMLI Residential.
Industry experts expect to see more such deals in coming years. “In early 2006, the opportunity was to sell your land that you bought six months earlier at a big profit to someone who was going to be a big condo developer or to sell your apartments at a 3 [percent] cap [rate] to some-who was going to be a converter,” says Peter Linneman, Albert Sussman professor of real estate at the University of Pennsylvania’s Wharton School. “The opportunity in late ’07 is going to be buying back your apartments from the failed conversion or buying back your land because the guy never got the deal off the ground, and you’ll buy it back at a discount to what you sold it at.”
FLIP SIDE With every opportunity, you’ll often find a challenge. For apartment developers, that will be the risk of potential oversupply in the market due to a large number of investor-owned condo units reverting back into the rental supply. This trend could jeopardize occupancy and rent growth. But analysts aren’t too troubled, saying supply and demand dynamics in most places favor the rental market.
“Condo reversions is a topic on most investors’ minds, but we believe the issue has been over-hyped,” says Craig Leupold, principal of Green Street Advisors, a Newport Beach, Calif.-based consulting and research firm. “There may be pockets of weakness in certain submarkets that experience a large number of reversions, but overall we expect reversions to have little impact on the U.S. apartment market.”