The apartment REITs hit full recovery mode as net operating income rose from negative 2.2 to positive 2.8 percent and revenues rose from negative 0.2 to positive 0.7 across REIT land in the quarter, according to Keefe, Bruyette & Woods (KBW), an investment banking and security brokerage firm based in New York.

Add that to the much ballyhooed lack of supply and Gen Y demand, and most REITs continue to maintain their longheld optimism. "While we’re beginning to see the benefit of reduction in supply [of new multifamily housing starts] this year, the real benefit will be over the next few years,” says Bryce Blair, chairman and CEO of Alexandria, Va.-based AvalonBay Communities in a transcript provided by KBW. “Whether it’s a modestly improving economy, a falling home ownership rate, positive demographics or an anemic level of new products, it is hard not to feel positive about the impact on rental fundamentals, both this year but increasingly so for 2011 and 2012."

Still, despite seeing guidances pushed upward across the board and a strong quarter that could be a harbinger of the widely expected better days from 2012 to 2015, many analysts also sensed that the REITs showed tepid optimism, especially for the near-term future.

“The tone on the earnings calls got more conservative this quarter,” says Andrew J. McCulloch, an analyst for Green Street Advisors, a Newport Beach, Calif.-based consulting and research firm. “There was less talk about ‘the best ever’ operating environment that could be on the horizon and more of a focus on the potential risks a still weak job market can pose to the sector. While rents are almost assuredly going to keep heading up, the sustainability of their recent trajectory is now being called into question.”

William Acheson, a REIT analyst with New York-based Benchmark Capital, thought the West Coast REITs lagged in the quarter and sensed some uncertainty, with specific firms more than across the board. “In terms of being honest about what the future might hold, two companies were particularly honest about that,” he says. “AIMCO and BRE Properties were both saying things are looking better, but let's be real, we’re still waiting to see the jobs.”

Strong Numbers
Even with some spotty economic news slightly dimming the apartment industry’s outlook, the REITs seem to be remaining on the offensive. That’s easy to understand with many of them pulling their leverage amounts down dramatically in the past couple of years. Now, they have large lines of credit and access to secured and unsecured debt.

The problem is those acquisition activities haven’t materialized on a widespread basis. Sure, almost every REIT made one-off buys, but the flood of buyers is driving apartment values high.

"Transactions that we’ve been tracking are closing at discounts to replacement cost and at lower cap rates as buyers have become more bullish on their ability to achieve near-term NOI growth,” said Tom Toomey, president and CEO of Highlands Ranch, Colo.-based UDR, in a KBW transcript. “With the cost of debt near historical lows, there does not appear to be any signs that the transaction market will be slowing anytime soon."

Build Up
That’s left development as the major way for REITs to bulk up for what they ultimately expect to be a strong demand environment. The openness to development shows that, despite some economic hiccups, there’s still a lot of confidence.

It wasn’t just development leader AvalonBay, which upped its development guidance from $400 million to $600 million. It was also companies such as Birmingham, Ala.-based Colonial Properties Trust; Houston-based Camden Property Trust; and Atlanta-based Post Properties talking about development. Companies such as San Francisco-based BRE Properties and Palo Alto, Calif.-based Essex Property Trust are also seeking land.

“People are more inclined to develop,” says Haendel St. Juste, an analyst with KBW. “People understand that starting development now is very fortuitous given what we expect to be a very strong market by mid- to late-2012.”

Camden, Post, and Colonial are companies that some analysts argue let their development pipelines get too big during the boom, but they still had land sitting on their balance sheet.

“Colonial is talking about it a lot more because they have a lot of land,” St. Juste says. “It sits on their books. It’s not income-producing so it skews the valuation a little bit and its not creating any value. Even though the yields [for development] may not be where you want them to be, the expectation is that the yields will improve as values improve.”