David Neithercut
David Neithercut

Last week, David Neithercut, CEO of Chicago-based Equity Residential, took time to talk to Multifamily Executive senior editor Les Shaver about the company’s deal flow and what he sees in the marketplace. In the second part of that interview, he discusses what Equity is seeing operationally around the country, specifically when it comes to development, local markets, and the potential for new multifamily IPOs in 2010.

MFE: How are things going in New York? The market fell off a cliff in late 2008, but have you seen things stabilize since then?
NEITHERCUT: We picked up some occupancy, and we feel pretty good going into our primary leasing season. Unlike past recoveries in our business, where we needed to recover 3, 4, or 5 percentage points of occupancy to get back into a position of raising rents, we ended last year being 94-plus percent occupied. We contended that as soon as our residents, who are employed, and our prospects, who are also employed, are no longer concerned about losing their jobs, then we should begin to recover the rental discounts that we received a year ago.

We wrote new leases a year ago that are down 10 percent on average across our portfolio. We don’t see any reason with 94 percent occupancy to continue that if the economy begins to improve and our employed residents and prospects are no longer concerned about losing their jobs. At that point, we can begin to recover some of that discount that we gave away a year ago. Back in the day, if you were 89 percent or 90 percent occupied, you had several percentage points of occupancy that needed to be built back up before you could start to move rents. And that required job growth in order to power rents in a material way. But I don’t think we need job growth to begin to chip away at the discounts that we gave in 2009 because our occupancy levels did not deteriorate.

MFE: Let's talk a little about development now. You announced a new ground lease deal in New York. When do you plan on starting that, and is there anything else in the pipeline you're working on?
The ground lease is something we could start working on in the second quarter or third quarter of this year. We also have several shovel-ready projects that we’re currently fully entitled and fully zoned with that we could start construction on in very short order, if we wanted to. We will consider those as the year progresses. A lot of that will be a function of what kind of acquisition opportunities exist in those markets and what’s happening to occupancy and revenue growth there, as well as whether or not we believe we’ll get appropriate risk-adjusted return on those incremental construction dollars that we put into those deals.

MFE: Are you at the point of taking down land for new projects?
NEITHERCUT: We’re always looking at everything. Even in 2009, we were looking around to understand what land parcels were out there and what opportunities might present themselves, which is why we ended up with this deal in New York down in Chelsea. That was a $50 million project. It wasn’t a huge capital commitment on our part. We’ll continue to look at opportunities and see what’s out there. There may be opportunities for us to do things with existing developers that are totally upside down in their land holdings or they have land loans maturating. Maybe there are opportunities to do some ventures with folks. We’re exploring everything. We’re looking at development versus acquisition and acquisitions versus development and constantly trying to determine what the best risk-adjusted use of capital is at the time.

MFE: Are there any markets you are trying to exit?
North Carolina had been an exit market for us for some time, and we're wrapping that up today for all intents and purposes. We're out of Texas and out of Tennessee and out of some other non-core markets. We continue to execute strategy. We’ve got assets for sale in non-Boston New England. While we’ve still got a fair number of assets in that marketplace, and it will take us a while to get out of there, we’ll re-assess that plan as markets change. In places such as North Carolina, where you’re just down to a handful of assets, you want to sell them. We don’t worry about whether it’s a good time or not because we’re getting a much better cap rate now. When you’re down to one or two assets in a market, just sell them.

MFE: What are you finding as far as buyer interest?
I think Freddie Mac and Fannie Mae will continue to provide huge market share of debt capital that finances those deals. As a result, there are a lot of local, regional players and buyers. These are fine assets we’re selling. Local people that own 2,000 or 3,000 units can do very well with these assets. Fannie and Freddie are providing very attractive, sub-6 percent financing. That’s creating sufficient demand for us to get the pricing that we think is pretty fair and reasonable.

MFE: There’s been some speculation recently about the potential for multifamily IPOs in the coming year. Do you expect the number of apartment companies in the public space to grow?
This is a tricky question. Will there be small companies that might go public? I suppose anything is possible because any investment banker loves making a 6 percent or 7 percent fee. But I don’t see the purpose. It wasn’t long ago where there were 33 [public] multifamily companies. Doug Crocker and Sam Zell used to say that we didn’t need that many, and 10 years from now, most of them will be gone. And, in fact, they were.

The reason I think it is a trick question, though, is that when a lot of people ask me that question, they actually mean, ‘Do you think Archstone will come public again?’ I suppose that’s possible. I think Archstone is a really different company. There is a platform there. There is a track record, and there is some public experience. There is management team and a platform that investors can get behind as opposed to the next new, little REIT. I’m not quite sure what niche, strategy, or purpose a $700 million REIT serves in the marketplace. I just don’t get it. The problem with Archstone, however, is that it’s too damn big. I’m not sure that a public IPO of that company solves the problems existing equity or senior lenders have with them. I don’t think it does much for Bank of America, the Lehman Bros. estate, or Barclay’s if they each own a huge position in a public company, and they’re locked out on their stock. So I don’t what’s going to happen there.

For the first part of the interview with Equity Residential CEO David Neithercut, click here. -