REIT Wrecks » Apartment REITs

Essex Property Trust Expects 35% Rent Growth in Certain West Coast Markets

REIT Wrecks — Fri, 18 Jun 2010 09:07:54 +0000

The REIT Week confab in Chicago is now over, and REITs of all stripes were reporting firming occupancies, better leasing activity, and stronger rents. The only weak spot appears to be suburban office properties, where landlords are still said to lack pricing power. Apartment REITs in particular were the beneficiaries of a strengthening economy. Roommates are actually feeling confident enough to split up and move back out on their own, and spare bedrooms are finally being turned back into offices.

Essex Property Trust is one apartment REIT that is ~~absolutely pounding the table~~ incredibly bullish on the rental market as well as its targeted West Coast market strategy. Essex is an Apartment REIT that owns 133 apartment communities totaling 27,143 units, with 585 units in development. 48% of the ESS portfolio is concentrated in Southern California, 30% in the San Francisco Bay Area and 22% in Seattle.

If you’re an apartment buff, you’ll know that roughly 58% of people between the ages of 18 and 34 are renters, and roughly 77% of people between the ages of 18 and 24 are renters. Both of these groups are growing at a rate not seen since the 1970s, according to data compiled by Piping Rock Partners:

At the same time, lack of construction financing is inhibiting new supply, and apartment deliveries could fall to post World War II lows:

Essex believes its portfolio will benefit from these trends, as well as the decline in the homeownership rate caused by a return to sane single family lending practices. Each 1% decline in the homeownership rate creates approximately 1.1 million “new” renter households, and Essex’s markets in particular still sport a huge spread between the cost of owning and the cost of renting. According to the REIT analysts at Stifel, this leads ESS to believe they will see a whopping 35% rental growth rate over the next four years in some of their markets. If so, that makes Essex’s 3.9% dividend yield look awfully cheap.

Freddie Mac Says Lever it Up!

REIT Wrecks — Tue, 09 Mar 2010 09:55:45 +0000

According to Instutional Investor, Freddie Mac is bringing its high leverage crack pipes back to the multi-family market. But the move is less a return to the go-go days than a sign of just how weak the market is, and it appears to be driven more by the fact that Freddie is running out of underwriting capacity rather than any real confidence in the apartment market.

Under the plan, Freddie intends to ~~bribe~~ join forces with a handful of mezzanine lenders to “expand its multifamily mortgage origination program”. However, the new program is definitely more about saving Freddie’s existing program than expanding it. Freddie Mac has already been offering relatively high LTV loans for some time, but the agency lender relies on liquidity in the CMBS market to refresh its underwriting capacity. With the CMBS market only now starting to show signs of life, Freddie is holding on to much more of this paper than it originally intended.

And this is where Freddie Mac wants its mezzanine lender “partners” to do some heavy lifting. In return for buying the lowest tranche of equity in Freddie Mac CMBS securitizations – the hardest bit to sell – Freddie will reward them with a well-priced senior loan at no more than 85% loan to value. Publicly, the program is geared toward helping over leveraged borrowers deal with looming mortgage maturities. “There is a market need for this,” said Patricia Boerger, a spokeswoman for the agency. “It is part of our mission to keep the market liquid and capital flowing.”

Privately however, Freddie now seems unable to fulfill that mission without the aid of private sector lenders, which ironically include still crippled Mortgage REITs like Winthrop Realty Trust. Even with the “new”, safer underwriting standards of today’s market, Freddie Mac intends to hold only the most senior paper, up to approximately 65% loan to value.

The more junior tranches, including the “B Piece” kryptonite, will sluffed off to the more servile Mortgage REITs, up to a combined 85% loan to value. I’m not a borrower in trouble, but if I were a borrower in trouble, I’m pretty certain that 85% of today’s value isn’t going to solve my 2006 problems. This “expansion” program is definitely more focused on saving Freddie Mac’s balance sheet, not those of its customers, and it’s another indication of what will most likely be a very prolonged recovery. Chris Germain San Francisco

No Bottom In Commercial Real Estate Until 2010 – 2011

REIT Wrecks — Sat, 20 Dec 2008 22:49:00 +0000

The good news is that the end is near, and I’m not talking about the rapture. Mercifully (unmercifully?), Moody’s said Friday that commercial real estate is going to get a whole lot worse before it gets better, but that it WILL get better. Unfortunately, that won’t be until 2010, at the earliest.

For now, Moody’s says that the deepening recession and the reduced availability of financing have heightened the risks for the US commercial real estate sector no kidding. The ratings agency cites the retail sector as most exposed to very tight-fisted U.S. consumers, but the gloomy picture they paint is the product of a very broad, thick brush: they say virtually no asset class will escape unscathed.

The hotel sector is clearly in the middle of the storm, as is retail, but demand for office space is also declining in many markets and industrial properties have been adversely affected by slowing trade and retail sales. Even multifamily (apartment) properties face trouble. It’s true that everybody needs a place to live, but Moody’s says there will be fewer “everybodys”.

Reduced household formation, a fancy euphemism used to describe the impacts of children moving back in with parents, other parents moving in with their kids, friends sleeping in closets, and in some cases, dogs and cats relinquishing the kennel to their masters, all combined with growing unemployment and the increasing supply of rentals in the “shadow market” of foreclosed homes, will create stress even at this level in Maslow’s hierarchy. For a little more dark humor on this topic, check out Public Storage: Sold on Craigs List!

Loan defaults will increase as well, but they’ve been at historical lows for so long this was inevitable. Moody’s expects the aggregate default rate on CMBS loans (0.75% as of November 2008) to revert to its long-term historical average of 1.5% to 2.0% in 2009, and most likely to surpass this level before the market begins to form a bottom in 2010 and 2011. They also expect commercial property values, which have declined about 10% from the peak reached in October 2007, to decline an additional 10 to 20% over the next 18 to 24 months.

Other than that, I’m assuming they would also like to wish everybody a happy and prosperous holiday season.

Click here for the full Moody’s press release on commercial real estate.

Disclosures: None at the time of publication
apartment reits, commercial real estate, reits, mortgage reits, reit