Long considered a bastion of hope in a treacherous real estate climate, the apartment industry is now feeling the pain afflicting the rest of the economy. That's evident in moves made by three major apartment REITs this week.
Denver-based AIMCO, one of the country's largest apartment owners with 197,158 units under its belt as of the close of 2007, announced that it is cutting approximately 7 percent of its workforce and will take write-off costs for abandoning certain redevelopment projects and deals. It expects this fourth quarter charge to range from about $21 million to $28 million.
"We won't spend as much money on redevelopment in 2009 as we did in 2008 and 2007," says Tom Herzog, AIMCO's CFO. "That's just based on the current economic environment. Also, the funding isn't as easily obtained as it used to be."
One possible factor is AIMCO's leverage issues. It had $282 million maturing in 2008 and has $347 million maturing in 2009 and $314 million maturing in 2010. Herzog says most of that debt is nonrecourse with maturities over a long period of time (the average maturity is 9.3 years across its portfolio). "We feel like nonrecourse debt gives us a lot of safety," he says.
AIMCO's cutbacks were not the first. San Francisco-based BRE Properties, which downgraded its expectations for 2009 in December, announced this week that it will discontinue predevelopment at three sites and record an abandonment charge of approximately $5.1 million. It will also eliminate the positions of 33 employees, primarily in the development area. The company reduced its overall workforce by 4 percent and its development personnel by 36 percent. It still has five apartment communities under construction.
Karin Ford, a senior analyst and vice president for New York-based Key Banc Capital Markets says there are differences in the two cases. "AIMCO's pressure is coming from their leverage; the credit markets are putting a lot of pressure on them," she says. "BRE is abandoning ground-up development and laying off people in their development arm."
REITs in general are slowing their development pipelines. Last year, Atlanta-based Post Properties, Houston-based Camden Property Trust, and Alexandria, Va.-based AvalonBay Communities announced they were ceasing development in 2009. Last week, Chicago-based Equity Residential announced it is taking a fourth quarter charge of about $115 million for impairments at five potential development projects that it no longer plans to pursue. Equity has already reduced its development staff and may continue to make adjustments as conditions warrant. It still has 10 apartment properties under construction that were not impacted by these actions.
Key Banc's Ford thinks it's fairly safe to assume more REITs will take off impairment charges and announce cutbacks in 2009, primarily because job losses continue to accumulate and credit hasn't eased.
"We're not expecting either to improve through the balance of this year," Ford says. "Maybe by the end of the year, you could see some easing, either when you start to get easier on the funding side or when the CMBS and bank lending markets come back and it's not just Fannie Mae and Freddie Mac that's lending to the industry."