As the apartment REITs wrap up reporting their fourth-quarter 2010 results and provide guidance for 2011, one major theme has emerged: Almost without exception, REITs want to build in 2011. After starting next to nothing in 2009, the REITs broke ground on $1.5 billion to $2 billion worth of new development in 2010 and are projecting $2.5 billion to $3 billion worth of activity in 2011.
“Their balance sheets are liquid,” says Haendel St. Juste, an analyst with Keefe, Bruyette & Woods (KBW), an investment banking and security brokerage firm based in New York. “They’re confident about the near-term growth outlook. There’s really no competition. The improving demand outlook makes development a prudent thing to do in the near term.”
Not surprisingly, Alexandria, Va.-based AvalonBay Communities is leading the way, projecting $850 million in new development in 2011 (after starting $650 million last year, which gives it a whopping $1.4 billion in new starts over the course of two years). Tim Naughton, president of AvalonBay, says this level is consistent with what the company produced in 2005 and 2006—during the middle of the last cycle.
“The case for new development is particularly compelling today,” Naughton said in the company’s fourth-quarter conference call, transcribed by SeekingAlpha.com. “The combination of attractive yields, which are generally 150 to 200 basis points above prevailing cap rates, along with cyclically low construction cost and strong fundamentals expected for the next two years present ideal conditions in which to expand investment in this area of our business.”
Following closely behind AvalonBay are:
- Chicago-based Equity Residential, with around $400 million to $500 million;
- Highlands Ranch, Colo.-based UDR, which is targeting $300 million in new starts;
- Houston-based Camden Property Trust, with between $200 million and $400 million in on-balance-sheet starts and another $50 million to $150 million in starts through its JV fund;
- Palo Alto, Calif.-based Essex Property Trust, with around $150 million in new starts;
- San Francisco-based BRE Properties, with $90 million to $120 million in development advances;
- Atlanta-based Post Properties Trust with $100 million;
- and Birmingham, Ala.-based Colonial Properties Trust with $50 million to $100 million in new starts.
But what may be most surprising is the activity of the REITs not commonly known as builders, such as Cleveland-based Associated Estates, which has one project underway, and Memphis, Tenn.-based Mid-America Apartment Communities, which has two projects underway. These companies are venturing into the construction arena by partnering with local developers. In fact, one analyst commented that everyone expected Denver-based AIMCO to have some development in its strategy as well.
“I think there’s still a view that for those companies that have access to capital, it’s a great time to do development because construction costs are still low and the rent growth opportunity is pretty significant,” says Paula Poskon, a senior research analyst with Robert W. Baird. “Even those REITs that haven’t historically been developers are dipping their toes in water.”
By starting now, when much of the world hasn’t started building again, the REITs have the advantage of opening their doors in years of peak expected demand.
"I think they do have a window before the construction lending market fully reopens to get their stuff started," says Andrew J. McCulloch, an analyst for Newport Beach, Calif.-based Green Street Advisors., "This really positive story for apartment fundamentals is almost universally accepted. And because of that, people are trying to put these development platforms back together, line up financing, and get something going."
While some analysts are starting to murmur about over development, McCulloch sees a bigger risk in low-barrier-to-entry markets. But most people seem to agree that oversupply is a couple of years away.
“We don’t really feel like we’re going to experience a measurable amount of supply until late 2012 and going into 2013,” says Paul Earle, COO at Colonial. “So we think we have really all of 2011 and 2012 with a very limited supply, and historic low supply numbers coming in bumping up against some really good fundamentals. And so on our projection, it looks like more late 2012 going into 2013 is where we might see some pressure.”