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Apartment REITs pursue bold development plans even as the economy remains shaky. By Joe Gose
Multifamily REITs are developing billions of dollars of projects in the face of dual threats that jeopardize several quarters of rent increases in most markets nationwide. Owners and builders of vacant single-family homes and condominiums are trying to rent their properties amid a housing glut that has created new competitive pressures on apartments. What's more, slowing job growth threatens to depress multifamily rental demand.
REIT executives and multifamily experts estimate that some 1 million new and existing excess units - 750,000 single-family homes and 250,000 condos - have been dumped into a for-rent housing pool that generally numbers around 13 million units.
The so-called "shadow market" is potentially most troublesome to REITs operating in Phoenix, Southern California, South Florida and other areas where single-family housing and condo construction ran amok for much of this decade.
Meanwhile, employment growth has hit a speed bump. U.S. non-farm payrolls increased by an average of 84,250 monthly in 2007, a 52% decline over the prior year's growth, according to the Bureau of Labor Statistics. The bureau estimates payrolls contracted by 17,000 in January 2008 - the first loss since mid-2003.
Convincing the skeptics
The wobbly economic climate hardly inspires praise for new construction. "At the present moment, development is not playing well with investors," says Timothy Pire, a managing director of public real estate securities for Chicagobased Heitman. The real estate investment firm manages some $5.1 billion in real estate stocks, and as of mid-February its portfolio was underweight in multifamily REITs. "Investors think companies won't be able to lease up the properties and yields will come in lower."
Multifamily REITs posted a 28% negative total return, which includes stock price performance plus dividend yield over the 12-month period ending Jan. 31. That was five percentage points worse than the total returns generated by all equity REITs during the same time period, according to the FTSE NAREIT US Real Estate Index.