Market report
Will the rental rebound continue in ’07?
For many firms, 2006 brought rising rents at last. “Almost 90 [percent] or 95 percent of our markets improved last year,” says Christy Curry Freeland, co-CEO of Riverstone Residential Group, who was thrilled with overall rental performance last year.
The best of the best? South Florida, where more than 50,000 apartments went condo between 2004 and 2005. Those rentals that remained enjoyed spectacular rent growth last year. Rents increased 13.8 percent just in the first half of 2006, according to McCabe Research and Consulting, a Deerfield Beach, Fla., firm that studies the multifamily market.
Things generally look good in many markets around the country. The key indicators for most: job growth and apartment (and condo) supply. The downturn of the past few years kept many people from building, in turn limiting apartment supply, while job growth has created more renters.
Ron Witten, president of Witten Advisors, a market research firm in Dallas, projects average rents will increase 4 percent or so across the country in 2007. “You won’t have a tremendous number of substantial laggers or substantial out performers.”
Here’s a look at some notable markets:
Formerly hot condo markets (Florida and Phoenix): Though apartment executives expect the market to remain solid, they don’t see 2007 being quite as strong.
“Florida may moderate a little bit. It is still a good market, but you have seen some pretty strong rent growth. Florida and Phoenix have seen strong rent growth this year. My bet is they will be a little slower next year.” –Scot Sellers, archstone-smith trust, Englewood, Colo.
New York and the Northeast: New York should remain strong because it offers both supply and demand characteristics that apartment owners crave.
“New York has had a phenomenal year,” he says. “It will probably have an equally good year next year. In some cases rents are over 20 percent there.” –Scot Sellers, archstone-smith trust, Englewood, Colo.
On the demand side, wages are high and people crave the convenience of being able to walk to work and shopping. On the supply side, it remains hard to build in the area.
“New York and New Jersey have barriers to entry. It’s too costly to build rental. You have to build for-sale. There’s been very little competition in the rental business.” –Alan Hammer, Kushner Cos., Florham Park, N..J.
Southwest and Southeast: These areas are entirely different when it comes to comparative advantages, but both spots remain well-positioned over the next couple of years. Generally speaking, both areas have seen job growth and rising home prices. But they’re also susceptible to large influxes of new multifamily units. Still, apartment executives expect good things for the next several years.
“Even in the Southeastern and Southwestern markets, we’re going to be in a period of muted supply for a couple of years. We expect the operating fundamentals to be strong going into 2007 and 2008.” –Eric Bolton, mid-america apartment communities, memphis
Texas: Smack dab in the middle of the Southeast and Southwest sits Texas, a market that makes a number of apartment executives feel very optimistic. Tom Toomey, president and CEO of United Dominion Realty Trust, a REIT headquartered in Richmond, Va., sees high oil prices driving this ongoing boom in the Lone Star state.
“Austin is going to continue to be strong. It looks very good on the job growth side. 2007 looks very good because supply is down, but we think supply will come back eventually.” –David Fitch, Gables residential, Atlanta
California: Things look good in the Golden State as well. “Our bet is Southern California gets stronger next year. It has been a great year for that market, but we bet it will get even better next year.” –Scot Sellers, Archstone-Smith Trust, Englewood, Colo.
Others agree.
“Markets that have been good–and we think will continue to be good–include Los Angeles, Orange County, and the Inland Empire.” –Ron Witten, Witten Advisors, Dallas
The Bay Area hasn’t been as strong, but people see potential.
“There are some other markets that are kind of late to the party, like the Bay Area and Denver. I think they still have a good bit of upside. Those are the kind of markets that have some good prospects ahead.” –Ron Witten, Witten Advisors, Dallas
Pacific Northwest: The tech resurgence will also help the Pacific Northwest, but that market isn’t quite as strong.
“Seattle had a great year, but there’s not as much depth to that gap to that economy and there’s not as much gap in home prices as there is in California. But Seattle should have a decent year next year.” –Scot Sellers, Archstone-Smith Trust, Englewood, Colo.
Midwest: After years on watching major players flee, apartment owners in the Midwest are just hoping for some growth.
“We’re seeing tightening occupancies in the Midwest. In some markets, we’re better now than we were.” – Jeff Kittle, Herman & Kittle Properties, Indianapolis
Still, compared to other markets, many think the Midwest looks weak.
“Big-picture-wise, the Midwest is definitely a lagger.” –Ron Witten, Witten Advisors, Dallas
Public Advancements
Public multifamily company performance improved right along with the apartment market in 2006. According to Green Street Advisors, a Newport Beach, Calif.-based firm that tracks public companies, apartment REIT net operating income is estimated to be up 7.3 percent in 2006. Total returns have risen as well, predicted to be up 32.2 percent this year as of press time.
“All the public companies have been doing quite well on rental growth and same-store operations because the water level has been rising for all of us,” explains Edward J. Pettinella, president and CEO of Home Properties, a public apartment firm based in Rochester, N.Y.
While the market has been improving, REIT executives have been adjusting their companies’ holdings, often opting for coastal markets where it’s difficult to build new properties and easy to maintain high occupancy rates. “[The REITs] have moved their portfolios around in a good way,” says Fitch, whose company was a public REIT itself until being bought by ING/Clarion in late 2005. “They’ve been able to weed out the non-performers because of the liquidity in the market. They’re extremely well-positioned and will continue to be attractive real estate plays for those who want to be in that sector.”
As leverage buyers, condo converters, and condo developers all leave the acquisition scene, it opens up the possibility for the public REITs to buy and develop more assets. “[Other public companies] have some very huge pipelines that they hope to bring out of the ground over the next two or three years,” Bolton says. “I think that a lot of projects will be successful. They’ve got growth built into their balance sheet over the next three to four years.”
Add to this the internal investments they’ve made, and it’s easy to see how public apartment companies can capture even more revenue into the near future. “A lot of the public REITs have continued to look at new systems and new technologies, including yield management systems, that will enable us to be much more aggressive operators,” Bolton says.
The markets have certainly rewarded REITs for such efforts in recent years, but not everyone thinks this will continue. “[The public companies] seem to be fairly priced, if not fully priced,” says Terwilliger, whose firm is private.
In fact, the NAHB’s Multifamily Stock Index, which tracks the stocks of 24 publicly traded firms including 20 REITs, hit 3,371 in September, which was its highest total ever. It represented a 1.25 percent gain over August 2006 and a 30 percent year-over-year increase from September 2005.
While rent growth helped drive these strong valuations, there is speculation that the sales and subsequent privatization of AMLI Residential, Gables Residential, and Town & Country Trust also played a role. But industry observers don’t expect many more–if any–big deals like that to materialize in 2007. “I think we’ve seen much of the public-to-private transfers,” Neithercut says. “The arbitrage that people were realizing by being able to buy these companies at meaningful discounts on replacement costs with the extraordinary low financing has gone.”
