NEW YORK (Reuters) - The U.S. housing market’s life-support status for the past few years has helped reinvigorate the apartment sector, as tougher mortgage requirements helped landlords retain tenants, while the growing job market kept renters on the move.
But like the U.S. housing market, the U.S. apartment sector -- and its investors -- could soon find itself pining for days long gone.
Despite posting significant profits in the second quarter, most apartment companies have warned that the second half of 2008 won’t be so rosy.
“The collapse of the housing market has meant that there are fewer people leaving apartments to go buy homes,” said UBS analyst Alexander Goldfarb. “That sort of helped the back door. What comes in the front door is driven by jobs. Jobs and rent are highly correlative.”
Tenants -- especially those in buildings owned by real estate investment trusts, which tend to have better properties -- are unlikely to have been exiles of mortgage foreclosures, as their poor credit makes them unattractive tenants. But tougher borrowing requirements have helped landlords retain existing tenants and sent new job starters in their direction.
That has enabled landlords to push rents higher. Annual apartment REIT revenue-growth peaked at 5.9 percent in 2006, according to Dallas-based Axiometrics, which provides information to apartment developers and investors. Today, that growth level is about 3 percent.
Typically, when occupancy is at 95 percent, landlords can raise rents. But as higher oil and food prices compete with rents, it appears unlikely landlords will be able to do so.
"In many markets, our new prospects are beginning to resist the current and increasing levels of market rents we've enjoyed over the past quarter," said David Neithercut, chief executive of Equity Residential EQR.N, one of the largest U.S. apartment owners.
Neithercut made his remarks in a conference call with analysts after the company said its funds from operations (FFO) rose 1.5 percent. The Chicago-based apartment owner of more than 150,000 apartments lowered the top end of its forecast for full-year FFO. It also reduced its forecast for comparable property revenue growth.
Job growth, or more recently, the lack of job growth has reestablished itself as the operative factor determining the apartment sector’s growth.
So far this year, the U.S. has lost 463,000 jobs, as unemployment hit 5.7 percent in July, its highest rate in four years. The outlook for jobs and the apartment sector will likely worsen, said Axiometrics President Ronald Johnsey.
U.S. job losses could reach 800,000 and extend into the later part of 2009, said Johnsey. The federal housing bill, which will grant tax credits to first-time home buyers, could exacerbate the apartment landlord’s pain.
“That’s going to be detrimental to the apartment market,” said Johnsey. He does not see pricing power to return to U.S. apartment landlords until 2010 -- depending on the health of the U.S. housing market.
“If we can stabilize the home prices, that will help the credit markets and there’s more liquidity,” said Johnsey. That in turn will help the job market and ultimately the apartment sector, he said.
During the second quarter, the strongest rental growth was seen in the most robust U.S. job markets -- Northern California and the Pacific Northwest, the home of Microsoft, Boeing, and Google. New York, where Wall Street is bracing for another round of layoffs is on landlords’ watch list.
"We haven't had significant move-outs, but we are respectful with the concerns of the financial sector and what may be coming in the back half of the year, and we are just watching carefully for what materializes," said Leo Horey, vice president of operations at AvalonBay Communities AVB.N.
The company said second-quarter FFO rose 4.2 percent and raised its forecast for the year. Turnover stood at 51 percent, the lowest level in eight years.
However, given the weakening economy and the volatile capital markets, the company scaled back its 2008 outlay for starting projects to $700 million from the original projection of $900 million to $1.1 billion.
Editing by Brian Moss
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