Fundamentals Weaken for U.S. Apartment Building REITs

Moody’s says the fundamentals of the US apartment industry have steadily eroded during the last six months. “The outlook for rental demand is more uncertain, and the ability of Real Estate Investment Trusts to withstand the resulting pressure on their ratings is more frequently brought into question.”

In response to the current state of the economy, multifamily REITs have increasingly adopted defensive postures with their balance sheets and operating activities, seeking to maximize liquidity via a number of initiatives, including the use of Fannie and Freddie debt, ratcheting down development activities, and asset sales.

It is difficult to ignore, and perhaps more of a challenge to fully comprehend, the severity of the maelstrom which pulls valuation, forecasts and sentiment lower each day.

One of the more frustrating exercises—though very relevant to multifamily REITs—is predicting when employment levels will stabilize let alone when the economy will begin to add new jobs. In the meantime, to the extent they are able, we expect landlords to sacrifice cash flow in order to maintain occupancies, which will mean declines in fixed charge coverage and increases in debt to cash flow ratios, though Moody’s sees little ratings pressure through the end of 2009, and we do not expect bond or bank line covenants to be threatened.

Peeking forward two to three years, we can foresee potential for a strong recovery for firms that endure this crisis … we could see record numbers of renters looking for apartments in a relatively supply-constrained environment. Of course, until then, fewer jobs mean fewer rent checks.

For details see Multifamily REITs: Fundamentals Continue to Weaken.

Comments

[Mad Hedge F...:]

The rot is spreading. The Manhattan residential market is now in free fall, after holding up better than every major market in the country for years. Rents have fallen up to 25% since the Lehman bankruptcy in September, dragging down condominium and co-op prices almost as fast. Hardest hit have been units priced in the $1-$2 million range that appealed to up and coming Wall Street traders. This class of newly unemployed former owners is now fleeing the Big Apple en masse. The stratospheric end of the market, the mega mansions and penthouses with those fabulous Central Park views and live-in nanny suites in the $30 million on up range, are still holding up. With industry job losses this year expected to exceed 100,000, expect this downtrend to continue.

Apr 06 02:02 PM

[jksisco:]

Not all Apartment REIT's are created equal, timing into the market is critical.

Apr 07 01:22 PM

[Chris B:]

"...we could see record numbers of renters looking for apartments in a relatively supply-constrained environment. Of course, until then, fewer jobs mean fewer rent checks."
----------------------...
That's an interesting observation that merits some questioning. Is there a decline in apartment occupancy due to:
1) a massive increase in homelessness,
2) a massive increase in home ownership,
3) or an increase in roommate / adult-kids-with-parents arrangements?

Or are there just more evictions, unpaid rents, and so on? The answer to these questions is key to predicting recovery. In any case, I agree with the unemployment / rent revenue correlation implied here.

Apr 07 05:08 PM

[Rix:]

This has been happening for a least a year in my neck of the woods.

One complex owner goes out of business, and another complex owner adds new tenants to the tune of allowing multiple families in units designed for less occupants, $200 less per month on rent (at least), free month incentives, less maintenance and repair availability, and a removal of the on-site liaison and security, all of which is leading to high turnover as long-term tenants leave for other places as everything falls apart.

Complexes that die stand empty for months, surrounded by chain-link fence, many located next to strip malls, inviting squatters, taggers, and others intent on misdeeds to frequent the neighborhoods.

Apr 08 04:05 PM