After months of struggling to fill units, apartment firms are finally starting to see a slow-but-steady uptick in occupancies. REITs, in particular, are leading the charge as they’ve typically been more aggressive than their private competitors at reducing rents to protect occupancy through revenue management software.
Case in point: Occupancy levels throughout Memphis, Tenn.-based Mid-America Apartment Communities' portfolio hit a new second-quarter record. The REIT saw occupancy hit 95.6 percent, compared to 95 percent last year.
“What we are seeing is honestly our worst markets aren’t as bad as they used to be," says Thomas Grimes, Mid-America’s executive vice president. “The markets that gained the most [occupancy] sequentially were the Florida markets, Jacksonville in particular; places like Houston, which closed solidly at 94.7 percent in occupancy levels; and Austin at 95 percent.”
UDR also saw a sizable pop at its Florida properties. The Highlands Ranch, Colo.-based REIT saw occupancy levels increase year-over-year in the second quarter, by 2.4 percent in Orlando and 1.6 percent in Jacksonville. The Mid-Atlantic is another strong market for UDR. The outskirts of Baltimore, Md., and Washington, D.C., suburbs jumped 3.2 percent year-over-year. Overall, UDR reported a 95.7 percent portfolio-wide occupancy level in the second quarter of 2009, versus 94.8 percent in the second quarter of 2008.
“REITs are better financed than our private peers and because of that, we have been able to continue to invest in our real estate and keep exteriors and interiors of properties looking better,” says Jerry Davis, senior vice president of operations at UDR. “For that reason, as rents have all gone down, we have been able to take occupancy away from the private guys because they have tended to starve their assets of capital expenditures.”
But UDR, like all companies public and private, has had to sacrifice rents. “Between renewals and new leases, we saw average new rents going down about 4.5 percent," Davis says. "Those are in line with our peers, but where they were losing some occupancy, we were able to push occupancy levels up 90 or 100 basis points.” Davis attributes much of that success to UDR’s technology-based marketing initiatives, such as its 24-hour call center; fully-loaded Web site; online leasing capabilities; and an iPhone application.
While smaller, private players may not be achieving occupancies at levels quite as high as the REITs, some are reporting an uptick. RMK Management Co., a Chicago-based apartment firm with 9,000 units in Chicago and Minneapolis, saw a 2 percent occupancy increase in the second quarter of the year, reaching the 93 percent mark portfolio-wide.Concessions in the first quarter were as high as two months of free rent, but the firm is now only giving away a month to a month-and-a-half.
“I think the assumption that occupancies have gone in the right direction is true,” saysDiana Julian-Pittro, RMK’s executive vice president. “The worldfell apart in third quarter [of 2008] and by the fourth quarter, we were in the 89 percent occupancy mark. With 30 percent of our people losing jobs, now that’s down to 23 percent or 24 percent.”
RMK also has seen a notable dip in the number of lease denials due to bad credit, from 28 percent to 30 percent in the fourth quarter of ’08 to roughly 24 percent in the second quarter. “It’s not a big percentage change, but instead of every third lease having to be released, it’s getting to be every fourth or fifth,” Julian-Pittro says. “That gives us a few more good leases every month.”
Multifamily executives expect more good leases to roll in throughout the remainder of the year. “We hope that occupancy remains relatively stable,” Grimes says. “We’ll use the third quarter to position ourselves and build occupancy for what is traditionally the weaker-leasing fourth quarter.”
Andrew McCulloch of Green Street Advisors, however, cautions that occupancies are not the best barometer of gauging demand. “We might see a slight downtick in occupancy as we move through the rest of the year, but REITs are going to aim to keep those occupancies in the 94 percent to 95 percent range, even though we are losing jobs and rents are going to continue to tick down,” says the senior analyst at the Newport Beach, Calif.-based research firm.