NEW YORK CITY-Sales activity may be stagnating right now because sellers aren’t willing to accept lower prices for their assets, but the heads of many REITs believe investment activity will eventually have a chance to pick up. That’s because many of the aggressively underwritten financing transactions that were closed in the past few years through the CMBS market will come to maturity, and refinancing those deals will be difficult.
At Bank of America’s Investment Conference, Equity Residential CEO David Neithercut and Keith Guericke, CEO, and Michael Dance, CFO, of Essex Property Trust, stated that the current focus is on the firms’ balance sheets and preparing to take advantage of opportunities when they do arise. The executives from both REITs believe it’s likely that financially troubled Lehman Brothers will be looking to unload some assets down the road, particularly those it gained in its JV acquisition of Archstone Smith, as well as some mezzanine debt portfolios on the West Coast.
In terms of operations, the management of Equity Residential and Essex said fundamentals have moderated even more. They didn’t go into specifics on how, but neither company changed its full-year earnings and property-level guidance range. Uncertainty over the financing environment, particularly in light of the federal takeover of Fannie Mae and Freddie Mac, over the next year will have an effect on deal volumes and pricing. Neithercut admitted that Equity Residential’s recently completed $550-million financing deal with Fannie Mae probably would not have been able to get closed today. Meanwhile, Essex’s Guericke noted that the spreads on GSE debt are still lower than in public unsecured financing.
Meanwhile, on the overall apartment REIT spectrum, property managers across the country reported relatively flat occupancy, reduced rents and increased concessions in August, according to BofA’s latest property manager survey. Even traffic levels deteriorated; some 39% of respondents said demand was below expectations for this time of year. BofA analysts feel that the dearth of new jobs and economic uncertainty is causing many tenants to put most decisions on hold.
Ten of 15 markets saw rents drop. Not surprisingly, the areas most negatively impacted–and where the decline will likely continue–are the once-hot housing markets, such as Las Vegas, Phoenix and South Florida. Also seeing signs of weakness are Dallas and Washington, DC. The good news is that multifamily construction levels remain low for the most part, given the glut of single-family homes on the market, so that’s not having much of an impact on the apartment sector.
BofA analysts reiterated their underweight stance on the multifamily REIT sector, since it’s more likely that it will face greater issues than see a turnaround in the near future. They are also not saying that asking prices for assets in the private market need to reflect the stricter loan-to-value requirements and higher costs of financing, since REIT stocks, which are currently trading at a 6.3% implied cap rate, have little wiggle room for operating weakness or a further deterioration in the financing environment.