Public REITs are poised to break ground on as much as $1 billion in new development this year in another sign of industry confidence that fundamentals are improving. Last year, public REITs hit a low-water mark by starting just $100 million in new apartment construction. That’s a steep fall from the average of $1.5 billion seen annually between 2000 and 2008.
But multifamily REITs are growing aggressive, issuing guidance that they will collectively begin between $600 million and $700 million in new projects this year. The bulk of that figure—a sizable $400 million—comes from Alexandria, Va.-based AvalonBay Communities alone, which plans to break ground on seven communities this year. Meanwhile, Chicago-based Equity Residential, Houston-based Camden Property Trust, Denver-based UDR, and San Francisco-based BRE Properties may also commit to more new development as the year goes on, which would bring the total figure up to $1 billion.
“Most REITs spent the past 12 to 18 months solidifying their balance sheets, and they also feel more confident in the eventual recovery,” says Andrew McCulloch, a senior analyst at market-research firm Newport Beach, Calif.-based Green Street Advisors. “For any REITs that were on the fence with certain projects, we expect them to put the shovel in the ground later in the year because fundamentals in the first part of this year have surprised people—rental demand is firming up quicker than people expected.”
McCulloch notes that some markets are seeing modest rent gains, or at least decreased concessions. But that’s a surprise given that apartment fundamentals usually lag employment growth by three to six months—in some markets, fundamentals are firming up ahead of meaningful employment growth.
Yet, what AvalonBay is planning still speaks to a cautious, scaled-down approach. “A lot of what AvalonBay’s doing is mostly suburban, garden developments in markets they’re already in, such as in the Northeast,” McCulloch says. “It’s a very specific product type with lower risk characteristics.”
Indeed, the new construction is only occurring in the healthiest markets. For its part, Equity Residential recently said that it plans to break ground soon on a 111-unit mixed-use tower in New York’s Chelsea district, for about $53 million. And both UDR and Camden have indicated that, while they won’t start any new development in the first half of 2010, the second half of the year could be an entirely different story.
One of the main attractions to building now is the fact that developers will be delivering units in a supply-constrained and not-too-distant future. “They want to be delivering when fundamentals are really getting hot—in the 2012 period,” McCulloch says.
This renewed (and larger than expected) pipeline, however, is not a broad-based trend. Large REITs such as AvalonBay and Equity Residential can afford to be more active given the size of their balance sheets and credit lines. Unlike the vast majority of builders, these firms don’t need a construction loan to build. Still, these early rumblings could serve as a bellwether for the rest of the industry and signal brighter days ahead.
