Zell's REIT believes the new lease
cycle will bring high-paying renters.

CHICAGO-The time is now to increase apartment rental rates, according to Equity Residential executives during their first quarter conference call Thursday. The Sam Zell-led REIT, which owns 427 properties and may bid $1.5 billion for a share of Denver-based Archstone, said the lost leases will be replaced by renters who can afford the higher rates.

The locally based trust reported revenue growth of 5.5% and net operating income growth of 7.8% in the first quarter, but admitted it faced resistance to price increases in its core markets. “We believe trading some occupancy or holding those higher rates is actually a good strategy at this point in the cycle,” said Fred Tuomi, president of property management, during the call. “As we enter the leasing season, we fully expect and begin to see a recapture of that occupancy at those higher rates. New residents still showed no problem at accepting and achieving these new rates.”

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This cycle of renters leaving but holding increases is occurring in major markets such as New York City, Boston and San Francisco, he said, but the trust believes the new lease potential is out there. Occupancy is rebounding up to 6% above last year in New York City, 10% in Boston and up to 12% in San Francisco, Tuomi said.

Struggling areas include Seattle, Los Angeles, San Diego and Washington, DC, he said. The East Coast capital has government cutbacks and an increase of 8,000 units this year, while the West Coast cities also have the same job cut/overbuilding issues, with Tacoma dragging down the Seattle market.

CEO David Neithercut said during the call that in Q1 the company only spent $159 million of the planned $1.2 billion acquisitions planned for the year. “However, like last year, we do expect the activity to increase as the year progresses,” he said. “There still is a great deal of capital chasing very few deals in the marketplace today. It really is quite simply a very competitive acquisition environment, and cap rates remain at the 4% to 5% range in core markets.” Acquisitions will be matched by sales during the year, he said.

Neithercut said the acquisition projection doesn’t include the $1.5 billion that the trust may offer for the roughly one-quarter interest in Archstone. He would not discuss the matter further, except to acknowledge that the process is a win-win, as even if Lehman, now the majority shareholder, exerts a right of first refusal and buys out the minority holding banks, Equity will still receive a break-up fee of $80 million. “There is a lot of parties involved, and many of those parties have different agendas,” he said.