Almost across the board, apartment REITs saw softening as 2008 drew to a close. And they don't expect 2009 to be much better.
“[The economy] is weak, and it's expected to get weaker next year,” says Bryce Blair, chairman and CEO of AvalonBay Communities, a REIT based in Alexandria, Va. Blair says the economy is losing about 100,000 jobs a month, which will start to impact operations. “We expect fundamentals to deteriorate, primarily because of the fall-off in demand,” he continues.
Already, the REITs are seeing a drop in same-store revenues. UDR, a REIT based in Denver, saw its same-store revenues for the first three quarters of 2008 fall from 5 percent to 4.4 percent to 3.4 percent. Chicago-based REIT Equity Residential, the country's largest apartment owner, saw its same-store revenues numbers go from 3.5 percent to 4 percent to 3.4 percent in the first three quarters of 2008.
“The companies sound more concerned that they are seeing slower demand because of a weaker consumer outlook,” says Stephen Swett, an analyst with Keefe, Bruyette & Woods, an investment banking and security brokerage firm based in New York. “They're seeing significant difficulty pushing rent increases on new residents. They're having more success in ratcheting up rents in renewal tenants.”
If the job loss figures double, as some experts expect, rent increases won't be possible at all, and concessions will probably grow. That could lead to a tighter strain on the REITs in 2009.
CASH LINE AvalonBay, for one, is seeing concessions rise to a month in some markets. And soon, they won't be alone. “Multifamily companies have been good at maintaining occupancies, but it's costing them some additional cash flow to keep those residents in place,” says Chris Wimmer, a vice president at Moody's, a rating agency in New York. “As the economy begins to slow, it will become more difficult to maintain occupancies at current levels.”
REITs are expanding their liquidity. “The balance sheets, for the most part, are in good shape, and we think they're well prepared going into to 2009,” Wimmer says. “They have lots of capacities and bank lines, and most of the maturities for the next 18 months have been either handled or aren't significant enough to give us cause for concern.”
Just take a look at activities at the largest firms. AIMCO added $60 million to an existing $600 million cash line item on the balance sheet in the third quarter. During 2008, AvalonBay sourced $1.8 billion of liquidity, generating $500 million from asset sales. In November, UDR renegotiated an existing Fannie Mae credit facility to expand the commitment to $300 million from $139 million and extend the maturity from 2010 to 2018. In August, Equity Residential closed a $550 million secured loan that gives the company about $450 million of cash and cash equivalents and roughly $1.3 billion on its unsecured revolving credit facility. The company anticipates having $660 million in cash by the end of the year.
Part of the REIT strategy in 2009 will also include a combination of selling additional assets and slowing development pipelines, analysts say. In the third quarter, to generate some of its additional cash, Equity sold 11 properties, consisting of 3,513 units.
They're also postponing new developments or shelving projects altogether. At press time, AvalonBay had opened seven communities and only broken ground on two new ones. In the third quarter, Equity didn't break ground on any new projects. Camden Property Trust, a Houston-based REIT, began construction on one project in the third quarter. “They're kind of letting their development pipelines taper off,” Wimmer says. “We like to see that because it's preserving capital.”