I am retired and take educated guesses on all things financial.

August 13, 2009

August 12, 2009: Apartment Rental Rates Set To Spike Upward

Many apartment owners can't wait until 2012. If the economy recovers, they will be looking at a perfect storm of events - a shortage of available entry-level housing units, a boom in demand driven largely by Millenials (real-estate jargon for those just about ready to strike out on their own), and the ability to push rents significantly higher due to a shortage of suitable apartments.

Tom Bozzuto, CEO of the Bozzuto Group, a Greenbelt, MD.-based multifamily manager overseeing 28,500 units in the Mid-Atlantic states, told Multifamily Executive Magazine recently that "It's not a lot of fun right now to be in the apartment business. But, you take pleasure in knowing that this is the trough in the wave."
Other pros in the field feel exactly the same way.

Ron Terwillinger, chairman of the country's largest multifamily builder, Trammell Crow Residential based in Dallas, TX expects rents to increase 5% in 2010 and another 10% in 2011. "It looks to me like there will be a rental housing shortage in 2012 and 2013", he stated. This is due in part to the number of Milleniums that will need to get a place to rent and the large decrease in the number of new apartments constructed in 2008 and 2009 (the trend continues into 2010 at the earliest). The lead time from land acquisition to finished apartment complex of scale is generally three to four years. Also, there has been a decline in household formation (marriage, other family units) which indicates less demand for homes and more demand for apartments.

Another reason for rental increases is that there has been a rise in the number of (usually) small volume landlords who have begun to disregard preventive maintenance and basic repairs. In essence, they have cut costs short term at the expense of their apartment unit value long term. Some have just walked away from their investments in both urban and suburban neighborhoods and banks are usually terrible landlords, without a clue as to appropriate Property Manager selection or the art of running an apartment complex. These type of apartments often become vacant lots or, creatively, condominiums after a thorough rehab.

How can the investor play this theme? Here are some interesting stocks to consider that are pure apartment plays:

Apartment Investing and Management Company (AIV) $$1.35b market cap

Avalon Bay Communities (AVB) $66.42/5.30%/$5.31b market cap

BRE Properties, Inc. (BRE) $28.13/5.30%/$1.49b market cap

Camden Property Trust (CPT) $34.92/5.20%/$2.24b market cap

Equity Residential (EQR) $27.81/7.00%/$7.63b market cap

Essex Property Trust, Inc. (ESS) $73.47/5.60%/$2.10b market cap

Home Properties (HME) $38.84/6.80%/$1.30b market cap

Mid-America Apartment Communities (MAA) $42.55/5.80%/$1.20b market cap

Post Propreties, Inc. (PPS) $16.04/5.00%/$712m market cap

UDR, Inc. (UDR) $13.25/5.50%/$2.0b market cap

All of the above have sustainable yields to entice the investor to wait for the positive apartment industry action to come.

The author does not presently have a position in any of the above securities. He does own a large position in rental real estate.