Apartment REITs with New York Exposure Competing with New Supply

Real estate investment trusts (REITs) that specialize in the multifamily sector, particularly those with an exposure to the high-end sector in New York City, continue to struggle in the face of new construction.

Equity Residential, which owns 40 properties with 10,007 units in the city, noted that rents at those units remained under pressure as the city is expected to see 15,000 units get delivered this year and another 17,000 in 2018. The city’s high-end apartment stock also is getting whacked by the lack of newly created high-paying jobs.

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Nonetheless, demand for units remains healthy, as evidenced by the company’s stable 95.9 percent occupancy rate for the city, which was down 0.3 percent from a year ago. The company’s New York units rent for a monthly average of $3,668. But concessions have averaged $575 per unit during the first quarter.

The Chicago company’s stock price has felt the pain. While it’s up 2 percent on the year, which is in line with a broader REIT index, it is down 7 percent over the last year. In contrast, the broader REIT index is up 2 percent during that period.

In a conference call with analysts this week, Equity Residential’s senior executives noted that rents at units that turned over during the first quarter declined by 6.2 percent and, overall, lease rates were down 1 percent during the period. The mitigant, however, is that the first quarter is usually a slow period, so the data aren’t too damning. As the company moves into the busy time of the year, it expects rental rates to stabilize.

Apartment Investment and Management Co., or Aimco, whose stock price is down 3.9 percent on the year, owns 18 properties with roughly 1,000 units in the greater New York area. While rents at those units have actually increased over the past year, their net operating income was flat during the latest period because of an increase in expenses. Its New York–area properties account for 4 percent of the company’s overall NOI.

AvalonBay Communities Inc., which owns 2,636 units in the city, saw monthly rents decline marginally, to $3,801 per unit, for those units, when compared with the fourth quarter. But they were up 2.1 percent when compared with a year ago. But New York City accounts for just less than 5 percent of its overall portfolio, which is concentrated in California, where rents in certain areas of southern California are up 5 percent over the past year. It also owns 3,300 units in the Seattle market, where rents have jumped by more than 6 percent. Its stock is up 7.3 percent so far this year and 4.8 percent over the past 12 months.

The good news is that escalating construction costs, as well as high land costs and the reluctance of lenders to provide construction loans with more than 65 percent leverage, have stifled any new development plans. So as units that are now in the construction pipeline get completed and absorbed, sailing ought to smooth out for New York landlords.

* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.