Avoid Apartment REITs Now

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Includes: ACC, AEC, AIV, AVB, BRE, CLP, CPT, ELS, EQR, ESS, HME, MAA, PPS, SNH, UDR
by: Laura Cadden

Multifamily REITs are toxic in today’s market. Don’t expect their declining share prices to turn around any time soon.

Single home sales are slipping everywhere. Even here in Baltimore City where values had been holding firm, prices began dropping hard and fast in the past month.

My first thought was to look to apartment REITs (real estate investment trusts) for potential profits in this scenario, but lately I’ve noticed local rental communities offering “$100 cash back” offers, “free deposit programs”, and “2 free months of rent with a 12-month lease”.

Almost every apartment REIT I researched showed losses last quarter and has lowered earnings expectations for the immediate future.

And Tuesday morning, Apartments.com revealed the results of a national survey…

Apartment rentals are down for the first time in six years and nearly 96% of renters surveyed said they would be moving this year. Most said it was due a desire to be in a new neighborhood or city, but many simply wanted more for their money.

Then there’s the real cost-saver of rooming with another and splitting the bill. Listings for roommates on craigslist.org increased from 255,900 in 2007 to 421,000 in 2008.

A quick look at the Dow Jones Equity All REIT Total Return Index shows REITs crashed right along with the market in September.

These Trusts used to lay the investor’s golden dividend egg. If REITs distribute 90% of their income, they are not required to pay corporate taxes… so pay out they did.

But this profitable goose is cooked…

None of the following multifamily REITs have reclaimed anywhere near their Fall of 2008 share price. A quick snapshot of some of the bigger players since Oct. 1, 2008 is telling…

  • Associated Estates Realty Corporation (NYSE:AEC), Camden Property Trust (NYSE:CPT), Home Properties, Inc. (NYSE:HME), and Mid-America Apartment Communities (NYSE:MAA) have slipped over 40%…
  • American Campus Communities, Inc. (NYSE:ACC), Equity Lifestyle Properties, Inc. (NYSE:ELS), and Senior Housing Properties Trust (NYSE:SNH) are down over 30%…
  • AvalonBay Communities, Inc. (NYSE:AVB), BRE Properties, Inc. (NYSE:BRE), Equity Residential (NYSE:EQR), and Essex Property Trust, Inc. (NYSE:ESS) are down over 50%…
  • Colonial Properties Trust (NYSE:CLP), Post Properties, Inc. (NYSE:PPS), and United Dominion Realty Trust, Inc. (NYSE:UDR) have fallen by over 60%…
  • And Apartment Investment and Management Co. (NYSE:AIV) has plunged over 80%.

All companies in this asset class will most likely underperform in 2009. For now, I recommend you keep them out of your portfolio.

Stock position: None.