When the music stopped in the residential real estate market, speculators who got caught with unsold houses and condos began putting them on the market as rentals. This "shadow market" has made investors jittery about price-destroying competition for the real-estate investment trusts that own big apartment complexes. For most of the country, though, it is a landlords' market, with vacancy rates falling and rents rising in many major cities. Despite a selloff in apartment REITs, the shadow market is really confined to real-estate disaster areas such as Florida, Las Vegas and Phoenix. That presents a buying opportunity for stock-market investors.
Figures scheduled to be released today by New York-based research firm Reis Inc. show that the nation's apartment-vacancy rate dropped 0.2 percentage point in the third quarter, while rents increased a healthy 1.4%. Apartment owners in high-price cities such as San Francisco and New York seem to be benefiting from renters who are getting locked out of the for-sale market because of the lack of so-called jumbo mortgages, which are more than $417,000, says Sam Chandan, Reis chief economist. Rents in New York jumped 3.6% in the third quarter. In San Francisco, they were up 3.4%.
That is all good news for publicly traded REITs that specialize in apartments. REITs are real-estate companies that pay no corporate income tax and distribute at least 90% of their earnings in dividends. Apartment-company stocks have suffered compared with their real-estate rivals. The Dow Jones Apartment REIT subindex is down 8.6% year-to-date, though the stocks have rallied in the past month. The overall Dow Jones Equity REIT index, which includes hotels, retail, self-storage and office properties, is down just 2.8%.
The stocks of apartment-owning REITs have a lot going for them. Nearly two million rental households have entered the market in the past two years, including buyers who have shied away from the for-sale housing market and those who defaulted on home mortgages. "That's equivalent to filling up New York City," says Raymond Torto, principal of CBRE Torto Wheaton Research, a real-estate research firm.
Some companies say investors haven't recognized that apartments, in some cases, behave in opposition to single-family homes, absorbing the decline in home ownership and lack of affordability. "They clump it all together," says Richard Campo, chief executive of Camden Property Trust, a Houston-based apartment REIT. Camden's stock is down 11.5% this year, closing yesterday's session on the New York Stock Exchange at $65.35, up $1.55, or 2.4%.
The supply of apartment buildings has been constrained by below-average construction of units, less than 100,000 units a year in the past few years in the top markets, according to Reis. And the echo boom -- the demographic bulge made up of baby-boomer offspring -- is entering prime renting age. "In our view, we will have more additional demand for renters than additional supply of rental property," says James Corl, chief investment officer at Cohen & Steers, a New York investment firm specializing in REITs. It has about $35 billion under management.
It is easy to understand why investors have been nervous about apartment REITs. For one, it is difficult to assess the impact of the shadow market because there isn't an accurate measure of the number of individual homes and condominiums that are on the rental market. "It's my greatest frustration," says apartment analyst Craig Leupold of Green Street Advisors Inc., a Newport Beach, Calif., real-estate research firm. "I'd love to get better data on how many vacant single-family homes are for rent."
James Kammert, portfolio manager at Transwestern Securities Management, a Chicago-based asset manager with about $250 million in the REIT sector, says the disc
Source: Wall Street Journal