As results begin to stream in from the multifamily REITs’ first-quarter earnings reports, the picture that is beginning to emerge indicates a full-fledged recovery—at least for the public apartment firms. Just look at the numbers. San Francisco-based BRE Properties’ revenue moved up 170 basis points from the fourth quarter of 2009 to the first quarter of 2010 (its average was just 100 basis points), while holding its occupancy above 95 percent and pushing its effective rents up 0.8 percent, according to William Acheson, a REIT Analyst with New York-based Benchmark Capital.
BRE was not the only company to see stronger pricing power, according to Benchmark. From the fourth quarter of 2009 to the first quarter of 2010, Alexandria, Va.-based AvalonBay Communities’ sequential revenue usually falls about 24 basis points. This year, it rose by 200 basis points, with occupancy levels rising 120 basis points to 96.2 percent.
Chicago-based Equity Residential saw a similar jump. Its sequential revenue from the fourth quarter to the first quarter jumped 120 basis points—much higher than the average decline of 12 basis points over the past five years.
Eyeing Inflexions
So is the recession over for apartment owners? While some analysts are hesitant to say that, two have said that it appears things have reached an inflexion point.
“It’s kind of surprising to see the improvement in [the REITs’] pricing power,” Acheson says. “From a normal first quarter to this first quarter, we saw sequential same-store revenue growth pick up speed.”
Alexander Goldfarb agrees. “Results and commentary so far make it clear that the apartment recovery has begun,” says the associate director of equity research of REITs for New York-based Sandler O’Neill + Partners. “Based on management’s commentary, it seems that demand is driven by increased confidence by those with jobs—whether it’s paying for amenities or reversing the doubling-up trend we saw during the downturn.”
Judging from comments throughout the first quarter, it wasn’t hard to see this coming. Equity Residential CEO David Neithercut told Multifamily Executive that employment wouldn’t have to move much for REITs to push rents. Ed Lange, executive vice president and chief operating officer at San Francisco-based BRE Properties, has said similar things about his West Coast markets.
Building Momentum
But questions do remain. For one, is the increase in REIT pricing power a harbinger for the rest of the industry? Perhaps not. Greg Willett, vice president of research and analysis for Carrollton, Texas-based MPF Research, says apartment companies that move rents first will be located primarily in markets where there’s a large gulf between the monthly cost to own and rent a home. With their move to the coasts and high-barrier-to-entry markets, most REITs reside in these localities.
Acheson also wonders if REITs can sustain this momentum. He says renters, sensing the days of multiple month concessions and rent cuts coming to an end, rushed out to lease in the first quarter, and it may have exhausted some of the demand for future quarters.
“We have to be cognizant of how optimistic we get,” Acheson says. “I don’t expect a sequential revenue increase of 150 basis points in the second quarter.”
