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2009 Dividend Cuts: AIV on 5-01; CPT on 5-06; UDR on 5-26; EQR on 7-29; BRE on 7-30; EDR on 10-08 Yield in spreadsheet are based on the Q2-09 div. HST and SHO has suspended the Q2-09 div Apartment Glut Expands WSJ 10-06-09 Apartment vacancies hit their highest point since 1986, surging in cities from Raleigh, N.C., to Tacoma, Wash., as rising unemployment continued to chip away at demand during the traditionally strong summer rental months. The U.S. vacancy rate reached 7.8%, a 23-year high, according to Reis Inc., a New York real-estate research firm that tracks vacancies and rents in the top 79 U.S. markets. The rate is expected to climb further in the fall and winter, when rental demand is weaker, pushing vacancies to the highest levels since Reis began its count in 1980. Meanwhile, the air leaving the market is driving rents down, most sharply in markets that had been chugging along until a year ago, when unemployment accelerated. Driving the change is the troubled employment market, which is closely tied to rentals. With unemployment at 9.8% -- a 26-year high -- more would-be renters are doubling up or moving in with family and friends during periods of job loss. Landlords have been particularly battered because unemployment has been higher among workers under 35 years old, who are more likely to rent. Nationally, effective rents have fallen by 2.7% over the past year, to around $972. "When job losses stop, rents will firm and occupancies will firm," said Richard Campo, chief executive of Camden Property Trust, a Houston-based real-estate company. The second and third quarters typically are the strongest periods for rental landlords because they are popular times for people to move. But this year, "vacancies just continued rising," said Victor Calanog, director of research for Reis. During the third quarter, vacancies increased in 42 markets, improved in 26 markets and remained unchanged in 11 markets. Omaha, Neb., saw the largest rise in vacancies, with the rate rising 1.1 percentage points to 7.4%. Other big rises were seen in Memphis, Tenn., Indianapolis, Raleigh and Tacoma. The deteriorating rental market comes amid some signs of stabilization in the housing sales market. An $8,000 tax credit for first-time home buyers and investor demand helped to boost sales of low- and moderately priced homes this summer. But some analysts warn demand could fall with the expiration of the tax credit and supply could increase with more foreclosed homes hitting the market. While a housing recovery could lead the best quality renters to move out and purchase homes, the move-out rate isn't expected to surpass levels seen during the housing boom earlier this decade. Mortgage credit standards have tightened considerably since then, which should keep more renters in place. Apartment owners ultimately could gain from the housing bust because the U.S. home-ownership rate has fallen as foreclosures rise. But the housing bust has also flooded some of the most overbuilt housing markets with new apartment inventory as developers have converted unsold condominium developments into rentals. Reis projects that the vacancy rate will peak at well above 8% in mid-2010. Apartment Updated Stats Loans on apartment buildings have led the real estate industry in defaults with hotels a close second. These types of properties have short leases and downturns show up quickly. But the tough times for both sectors do not bode well for the rest of the commercial real estate industry, where longer leases can mask falling market rents. "It makes me wonder whether the avalanche is on its way for office and retail (real estate) unless things change really quickly and really drastically," Victor Calanog, Reis director of research, said. Reis still expects the U.S. apartment vacancy rate to pass the 8% mark by perhaps next quarter but certainly by next year, Calanog said. That would make it the highest vacancy rate since Reis began tracking the market in 1980. In the third quarter, the U.S. apartment asking rental rate fell 0.5% to $1,035 per month, the fourth consecutive declining quarter. Factoring in months of free rent and other perks landlords have been using to lure or keep tenants, effective rent fell 0.3% to $972, also the fourth consecutive quarter of declining rent. "We have not seen that before," Calanog said. Vacancy could be worse if landlords didn't realize fairly early on that this end game was not going to end well and lowered rents really quickly," he said. Reis does not foresee a turnaround in the apartment market until at least the second quarter of 2010 at the earliest. "That turnaround may be very tepid," he said. "It might just be that vacancies are flat." Complicating the problem is the ongoing supply of new buildings. Reis expects more than 100,000 units to come to the rental market through 2009. Of that, 73,000 units have already come online in the first three quarters of the year and were on average 42 percent vacant. In New York, the vacancy rate fell 0.10 percentage points to 2.9%. Effective rent fell 0.9% to $2,657 per month. "With job markets still being lost at the national level and with New York being relatively more dependent on the still-embattled financial services sector, it may take a few more quarters before we see rents bottoming out in the Big Apple," Calanog cautioned. Some of the worst markets, such as those in South Florida and California, saw significant rent declines but they did not register effective rent declines of over 2% as they did in the second quarter. On 10-08 EDR announced a reduction in the quarterly dividend to $0.05/share payable November 16, 2009 to shareholders of record as of October 30, 2009. On 9-21 R.W. Baird analyst Paula Poskon lowered her rating on Mid-America Apartment Communities, saying that going forward, the stock may not be as appealing to investors looking for growth. MAA, which is up 28 percent in 2009, has been an attractive pick in turbulent times because of its conservative portfolio, small amount of debt coming due in the next three years and safe dividend. MAA may post better-than-expected results in Q3-09, and the stock could rise above $50. Mid-America closed Friday at $47.71. "But ultimately, a year from now we expect the market to be squarely focused on growth names in advance of the expected late 2011-into-2012 recovery," Pokson wrote, and Mid-America will likely trade between $45 and $50 next September. She downgraded Mid-America to "Neutral" from "Outperform." While apartment REIT shares will see a lot of volatility from now until September 2010, she expects the stocks she covers to wind up at the same level or higher than they are now a year from now on economic recovery prospects. She raised price targets across the board. Poskon reiterated a "Neutral" rating on Camden Property Trust, Essex Property Trust and UDR. She left AvalonBay Communities at "Underperform" and maintained an "Outperform" rating on Associated Estates Realty Corp. On 9-02 Fox-Pitt Kelton boosted its rating on Equity Residential to "Outperform" from "In Line" Wednesday, saying the apartment building REITss current stock price doesn't reflect the better-than-average quality of its property portfolio and balance sheet. EQR has improved its properties in the past few years by selling older assets and buying into better-located developments on the coast, according to analyst Robert Stevenson. EQR's average rental rate of $1,342 is now 13% better than its competitors' average rate, he said. EQR also has sufficient liquidity to meet debt obligations through 2011. Given those positives, Stevenson thinks EQR's stock will stand out from other REITs. He said the sector is due for a pullback, with shares having doubled as a group since early March. When that happens, Equity Residential should do better in the stock market than its rivals, he said. On 9-15 CPT declared a dividend of $0.45/share payable 10-16 to holders of record as of September 30, 2009. On 9-16 AVB delcared a dividend of $0.8925/share and is payable October 15, 2009 to all Common Stockholders of Record as of September 28, 2009. On 9-16 PPS declared a dividend of $0.20/share payable on October 15, 2009 to all common stock shareholders of record as of September 30, 2009. On 9-17 ESS declared a dividend of $1.03/share payable October 15, 2009 to shareholders of record as of September 30, 2009. On 9-14 HST declared a dividend of $0.25/share payable on December 18, 2009 to common stockholders of record at the close of business on November 6, 2009. On 9-30 UDR declared a dividend of $0.18, payable on November 2, 2009 to UDR common stock shareholders of record as of October 16, 2009. |