Investors being drawn back to apartment stocks
Sam Zell's Equity Residential and AvalonBay Communities Inc. are drawing investors back to apartment stocks four months after their best days looked to be behind them.
Their surprise $16 billion deal last week to acquire Archstone Inc. from Lehman Brothers Holdings Inc. ended a plan by the defunct investment bank for an initial public offering of its biggest asset and halted a 13 percent slide in apartment stocks since their July peak. The slump was driven by concern that rising homeownership and new construction would weaken landlords' power to raise rents as a mammoth share sale flooded the market.
"The storm cloud has been lifted with the cancellation of the IPO," said Dean Frankel, senior portfolio manager at Urdang Capital Management in Plymouth Meeting, Pennsylvania, a unit of Bank of New York Mellon Corp. that oversees about $6.3 billion of real estate securities globally.
Household formation is still increasing demand for rental housing and the tepid pace of U.S. job growth suggests homebuying remains out of reach for many people. Whether the apartment market gets overbuilt depends partly on lenders, said Gleb Nechayev, senior managing economist at CBRE Econometric Advisors, the Boston-based forecasting unit of commercial broker CBRE Group Inc.
"We do expect the rental market to remain strong and the big question on everyone's mind right now is how aggressive will development get?" Nechayev said. "If new construction will remain disciplined, the market can ride this wave for a fairly long time."
The largest sources of financing for apartments are the government-owned mortgage finance companies Fannie Mae and Freddie Mac, said Sam Chandan, president of Chandan Economics, a real estate research firm.
"Their books of business are performing very well," Chandan said. "Even under conservatorship, Fannie and Freddie have taken the lead in supplying credit to the multifamily sector. The availability of credit has, in turn, supported property sales and prices."
At banks, the default rate for multifamily mortgages was 2 percent of outstanding loan balances in the second quarter, down from a peak of 4.7 percent in 2010's first quarter, Chandan said. He estimates the bank default rate will fall to 1.5 percent by year's end. Before the global credit crisis, the default rate for banks' multifamily loans was about 0.3 percent.
The Bloomberg Apartment REIT Index, led by Equity Residential and AvalonBay, almost quadrupled from its March 2009 low to its July peak this year, before its decline wiped out the gains for 2012. With the foreclosure crisis forcing people into rentals, apartments had led the recovery in commercial real estate since the economy came out of recession in late 2009.
Equity Residential and AvalonBay drew investors with stock sales last week to help finance the Archstone purchase. Equity Residential sold 19 million shares at $54.75 each, almost 17 percent less than its July 17 high of $65.72.
"There's a nice opportunity for the stocks to rebound," said Kenneth Weinberg, senior portfolio manager at CBRE Clarion in Radnor, Pennsylvania, which manages about $20 billion of real estate-related assets.