Multifamily REITs presenting June 5 at the National Association of Real Estate Investment Trusts' NAREIT 2008 REITWeek Investor Forum in New York City were unanimous on three points: fundamentals are great; acquisitions and new multifamily construction are practically nonexistent; and urban infill, transit-oriented product is the asset of the future.
"The acquisitions market is crazy right now," said Edward Pettinella, president and CEO of Rochester, N.Y.-based Home Properties. "The velocity of deals we are looking at is almost identical to the past two years, but our activity is zero. We have zero pipeline right now."
Although Home typically averages about $254 million in acquisitions per year, Pettinella said Wall Street types and mom-and-pop multifamily operators alike are sitting tight until interest rates stabilize and the gap between implied cap rates and transactional cap rates decreases. "Whether it is Boston, Philadelphia, D.C., or even Florida, we just cannot do accretive deals," Pettinella said.
Despite the lack of action on the asset trading front, Home -- like most multifamily apartment REITs presenting at NAREIT -- reports portfolio fundamentals are great. High occupancy, low turnover, and a lack of new supply coming online have most public operators sitting pretty. "It's a good time to be in the apartment business," said Chicago-based Equity Residential Properties Trust CEO David Neithercut. "We are seeing 95 percent occupancy across the portfolio, even in Florida. We are very comfortable with our forward inventory, traffic remains very strong, and we're seeing the ability to raise rents on renewals. It's a terrific time for multifamily, and I don't see why that will change."
Indeed, instability in the capital markets is preventing full-force M&A activity. But that same unsteadiness is limiting access to construction financing, which prevents new multifamily product from coming online and eventually boosts product demand as renters return from a crumbling single-family housing market.
"We are keeping an eye on three factors: employment, housing affordability, and new supply," said Tom Toomey, president and CEO of Denver-based UDR. "New supply is at all-time lows. We are tearing down more apartments than we are building. I feel good about the business in the short term. The long term is a demographic and job market game, and we see [future renter demographics and job creation simultaneously occurring] on the West Coast, across the South, and up the Eastern seaboard, so we have put the portfolio in a position to take advantage of that."
Toomey said UDR's renter base is already dominated by young, affluent professionals who use technology in both their business and social lives. Consequently, the company is beginning to adopt transaction models form the airline, hotel, and car rental industries to create more of a shopping experience for those electing to lease online. UDR -- which currently has about 44,000 units spread across 20 markets -- is also focusing on creating a portfolio dominated by assets close to rail, bus, and metro lines.
"The reason we are outperforming our peers is because we are on transportation hubs near employment centers, and not out in the suburbia sprawl," Toomey said. "We anticipate strong operating results for the reminder of the year. Our portfolio is very well-positioned, and our balance sheet is probably as strong as it has ever been."
Equity Residential executives also pointed to demographics and a fortified balance sheet as key advantages for their company in an uncertain economy. Company Executive Vice President and CFO Mark Parrell noted that the REIT has plenty of liquidity, including $440 million of cash on hand that the firm will use to pay off all 2008 maturities.
"2009, 2010, 2011 we think will be very positive," Neithercut said. "The Echo Boomers are flocking to urban areas, where the job growth will be. We feel positive about those demographics and positive about the lack of new supply-not just today, but for the future."