Sule Aygoren Carranza is managing editor of Real Estate Forum.

NEW YORK CITY-A trio of CEOs from national apartment REITs met here recently for Bank of America's annual Multifamily REIT Roundtable. Tim Naughton, president of AvalonBay Communities of Alexandria, VA; Richard Campo, chairman and chief executive officer of Houston-based Camden Properties Trust and Keith Guericke, president and chief executive officer of Essex Property Trust of Palo Alto, CA were among those who attended.

The executives expect fundamentals to moderate this year, with near full occupancies, the slowdown in the for-sale market and declining job growth sending same-store NOI growth on a downward path--between 3.5% and 4.25% in 2008 compared to 5.5% to 6.5% in 2007. Since rents aren't on the upswing, BofA reports, "the management teams appear set to attack expenses more aggressively."

Other challenges for the CEOs are trying to deal with the credit crunch and determine how it will impact debt spreads and pricing of assets in the private market.

Geographically, performance by market will vary. Most agree that Northern California and Seattle will be top performers again because of continued demand, limited supply and low housing affordability. Guericke, for instance, believes Essex "will continue to have pricing power in Seattle through 2009 with rents representing 15% of median income [vs. 17% historically] and new supply that is expected to represent just 1.2-1.3% of total stock."

He adds that the ongoing problems in Southern California may actually help Essex because people who lose their homes in places like the Inland Empire and Anaheim could potentially move closer to their jobs in the coastal locations, which has a high concentration of the firm's assets. And although BofA doesn't have high expectations about Boston this year, Naughton is optimistic the market's performance could surprise investors.

Campo, whose firm has a lot of properties in once-hot housing markets, related that Camden has been able to successfully market units to homeowners that may have lost their home to foreclosure. "The supply problem in his view has been more a function of excess single-family homes on the market than condos, although as units continue to come on-line in South Florida that tune could change," reports BofA. "Camden does not expect growth to turn negative in any of its markets in 2008, although a few may remain in the red during the first half of the year." Campo adds that Texas, which houses 16% of Camden's portfolio, should continue to be one of the best markets in the US.

There is a chance the pace of supply could slow this year. "We continue to have concerns that 6% to 7% expected development yields could come under pressure given economic weakness and increasing levels of new supply and do not appropriately price in the risk of ground-up development as acquisition cap rates appear set to move higher," state BofA analysts. Though the executives are positive on yields, both Campo and Naughton said they'd probably delay a number of projects that just don't make sense right now. Trammell Crow Co. is also expected to slow building by 30%.

This, says BofA, could lead to a strong 2009 and 2010, especially as the excess stock of single-family homes and condos is absorbed over the next 12 to 18 months, more households enter the rental pool, the homeownership rate declines and construction of for-sale product slows. "That said, we believe the existing supply issues and macroeconomic concerns will likely continue to outweigh the benefits as we progress through 2008."

Despite the tighter capital market conditions, the CEOs maintained that apartment valuations in the private market have remained steady primarily due to the attractive terms available from Fannie Mae and Freddie Mac. Borrowers are now able to take out a 10-year loan at spreads of 150 to 175 basis points over the Treasury, resulting in an all-in cost that is about the same as two to three quarters ago. Further, the CEOs believe the $10 billion in institutional capital that's waiting on the sidelines could prevent cap rates from rising too quickly. All three executives expect sales volume to rise in the first half as more properties are put on the block and asking prices decline. Campo in particular said M&A activity could hit $50 billion this year.

Cap rates are also expected to increase by year-end, by as much as 75 basis points over midyear 2007, according to BofA estimates. The three executives note there is a significant arbitrage opportunity given the implied cap rates stocks are trading at--6% to 7.3%--and where properties are trading in the private market--4.5% to 7.3%. This could clear the way for buybacks.

"We continue to favor this strategy and notably, none of the CEOs were against selling assets to the point where they would be forced to pay a special dividend if the dislocation continues," write BofA researchers. "An increase in the volume of transactions should provide a glimpse through the looking glass as to where cap rates currently stand, but we do not believe it will necessarily act as a near-term catalyst for the stocks given the forward-looking nature of the public markets."

Overall, BofA is cautious for the sector for the next four to six months, since the potential pitfalls outweigh the positives. Though it believes it's still too early for investors to enter the asset class, the firm recommends Essex as its top pick.

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Though Cautious, REIT CEOs Upbeat for Long Term

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