In an industry where bigger traditionally means better, the largest multifamily owners of property reported little growth in number of units owned. In fact, out of the five largest owners, three had a decrease. The largest, New York-based CharterMac, benefited from investments outside the United States to increase its portfolio.

Instead of growing by units, many companies chose to be net sellers, balancing their books, operating more efficiently, and waiting patiently for the next great expansion.

Reorganization In the early '90s, real estate investment trusts (REIT) ruled the world of multifamily acquisitions. These public companies had access to cheap capital and were all set to buy portfolios and entire companies. Selling was not part of their vocabulary: They wanted to acquire as many assets as possible so they could manage with the most efficiencies. Today, many REITs have healthy balance sheets and continue to look to grow their portfolios, but their approach is different, says Thomas Toomey, president and CEO of United Dominion Realty Trust, a REIT based in Littleton, Colo., which ranked No. 9.

Thomas Toomey
Thomas Toomey

"REITs are using this short window to sell and reload," he says. "You'll see many of these companies back in 2005 starting to move actively in acquisition mode."

For the last three years, United Dominion has been adjusting its portfolio. "We are using this period to reposition in faster-growing markets and strengthen our balance sheet," says Toomey. As a result, its portfolio has seen very little movement – averaging around 75,000 units per year.

Apartment Investment Management Co. (AIMCO), a REIT which has aspired to the No. 1 spot in terms of multifamily units owned and ranked No. 3 on the Multifamily 50 list, grew rapidly in the late '90s. The company, traditionally a buyer of assets, sold $930 million worth of property in 2003, compared with a total of $500 million in the previous three years, says Jeff Adler, executive vice president for conventional property operations for the Denver?based company. In 2003, it added $163 million worth of new communities.

"We are selling in areas where there are not favorable markets," explains Adler. Then the company buys in New York, Los Angeles, and south Florida – markets with proven performance.

In fact, a lot of REITs took hard looks at their portfolios and sold off assets in non-core markets. "We are investing every dollar we sell into new purchases, into higher-quality, better-located, better long-term prospects," says Gerry Spector, executive vice president and COO of Chicago-based Equity Residential, which ranks No. 2. The company expects to see another decrease in number of units owned this year.

The economic slump has hit home beyond the REITs. Simpson Housing Solutions LLC, a provider of affordable housing, exited markets that were too difficult to operate in, says Michael Costa, president of the Long Beach, Calif., firm.

The company, which ranked No. 48, closed offices in Florida, the Midwest, and Cleveland, and eliminated the acquisition group in Charlotte, N.C. These markets had softened, causing rents to drop from classes. "When C product rents drop, they compete with affordable communities," he says. In some markets, Costa had an affordable product with above-market-rate rents.

"We are pulling out of markets where we see that situation," he says. The company is concentrating on markets where its affordable rents will be at least 10 percent below market-rate, mostly in California. This strategy also allows the company to become more selective in acquisition, development, and the players and markets to focus on.

Defining Growth While the number of units owned by Home Properties decreased in 2003, the company considers itself a net buyer because it looks at growth in terms of acquisition prices, says Edward J. Pettinella, president and CEO of the Rochester, N.Y.?based REIT, which ranked 19th. "We bought $93 million [in assets] and sold $59 million in 2003, for a net increase of $34 million," he says. "In 2002, the net increase was $329 million, and in 2001 it was $90 million.

Jeff Adler
Jeff Adler

"When the company is in growth mode, it does better," says Pettinella. The company is growing by repositioning assets in a higher class. "Residents are willing to pay for upgrades," he says. Each time it upgrades a kitchen or a bath, Home Properties increases monthly rents, which drives net operating income.

AIMCO also plans to grow by redeveloping current assets. Its portfolio has a large concentration of slightly older properties in good locations, ripe for redevelopment, says Adler. The company expects to begin upgrades on 40 projects this year.

"Most [REITs] are recycling existing capital," says Spector. "We have a choice of raising debt or equity. ... In order to grow, you have to reinvest [everything you sell], plus raise new equity or debt. We are certainly in the position to do that."