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Supply And Lending Constraints Hearten Apartment Reits

One reason apartment REIT executives remain so bullish about an imminent recovery in rents and net operating income has everything to do with the difference between previous downturns and the current one: This time around the sector doesn't have a lot of vacancy to burn through, and the development pipeline is emptier than usual.

Falling home ownership and the constriction in supply should push occupancies and rents up more quickly than in a normal cycle, experts contend.

Encino, Calif.-based Marcus & Millichap predicts that apartment developers will add 180,000 units over a three-year period from 2010 through 2012. The brokerage also projects that the average vacancy rate nationally will drop to 5.4 percent from 8 percent over that time. That's a stark contrast from the three preceding years, when 355,000 new units were added to the supply and the average vacancy rate climbed from 5.8 percent to 8 percent.

In past cycles merchant builders began to put up new product at the first hint of recovery. But now lenders are making few loans to merchant builders. And when they do, banks require 35 percent to 50 percent of a project's cost in equity. Earlier, builders typically needed half that amount.

“The merchant builder model in the way the business was financed is totally broken,” says Richard Campo, CEO of Houston-based Camden Property Trust, which owns 64,000 units primarily in the Southwest, West and Southeast. “Merchant builders build 85 percent of the apartment inventory in America, and getting that business ramped up again is going to take time.”

Apartment owners face competition from “synthetic” supply — empty condos and homes put up for rent, says Hessam Nadji, managing director of research services with Marcus & Millichap Real Estate Investment Services.

“There is without a doubt excess rental housing supply,” he says. Nearly 3 million single-unit homes were vacant at the end of the second quarter, a decline of about 100,000 units from the end of 2009.

“You can actually rent a house in Las Vegas cheaper than you can rent an apartment,” says Campo. “But the people who live in our apartments are different consumers. They want to live close in, near other people and they want services — swimming pools and somebody to come fix their air conditioning when it breaks down.”

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