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Apartment Leases, Rents Pick Up

Date: June 16 2010
Source: The Wall Street Journal

Apartment operator Associated Estates Realty Corp. watched rents on new leases fall 8.8% in December, the biggest year-over-year drop in its 35-year history.

But in May, some relief: Lease rates turned positive, climbing nearly 1% from a year earlier. "It's small, but a positive indication of the turnaround," said Jeffrey Friedman, chief executive of the Ohio-based company that owns nearly 13,000 units.

For the first time since the downturn, some of the nation's largest apartment-building landlords are reporting that rent declines have stopped and some are even boasting modest increases. Green Street Advisors, a real-estate research firm, says demand might have struck bottom in the first quarter—two quarters ahead of expectations

Apartment trends are closely related to employment. While the Labor Department earlier this month reported disappointing hiring statistics for May, the economy is still adding jobs. With layoffs no longer dominating the headlines, those who have kept their jobs have been more likely to sign leases. Renters who bunked with roommates during the crash are moving to their own apartment, while others are upgrading.

Also, now that the first-time home-buyer tax credit has expired, fewer renters are expected to leave for homeownership. This comes as more consumers decide to rent by choice. Renters can "wait out the turbulence in the single-family market," Mr. Friedman said.

From January through May, rents climbed 2.8% nationwide, according to Axiometrics, which tracks the national apartment market. One of the biggest improvements was a 9.4% gain in Tacoma, Wash., and a 6.5% increase in San Jose, Calif., two markets benefiting from technology-sector hiring. On the East Coast, hard-hit Miami has climbed about 4%.

Not every market is up: Florida's Cape Coral-Fort Myers, another housing-bubble market, fell 4.8%, while Las Vegas saw a 0.6% slip.

Despite recent gains, rents remain down more than 5% below the 2008 peak, according to Axiometrics. And recent gains could be slowed—or even halted—if the job sector weakens further or the stock market plunges again.

"Given the lackluster job reports so far this year, it is fair to question the sustainability of the rent growth," said Andrew McCulloch, an analyst with Green Street.

Still, publicly held operators remain optimistic. At a recent industry gathering, several public apartment landlords predicted their results this year would be at the high end of their guidance.

Since the beginning of the year, for example, Denver-based UDR Inc., which has about 50,000 units nationwide, has increased market rents by more than 4% to an average of $1,100 a month.

AvalonBay Communities Inc. last week announced an increase in its 2010 earnings outlook. This year's funds from operations, a key metric for real-estate investment trusts, is expected to range between $3.85 and $4 a share, up from the $3.60-to-$3.85 per-share range projected in February.

AvalonBay said that it is benefiting from better-than-expected employment levels earlier in the year, combined with household formation and homeownership trends in its regions.

"The impact for the rest of the group is meaningful," said Alexander Goldfarb, a REIT analyst with Sandler O'Neill & Partners, which this week increased its earnings estimates for several companies including sector giant Equity Residential, UDR and AvalonBay.