Summary
The apartment industry is subject to a great deal of coverage, and some of it, justified or not is decidedly negative. As an industry that is subject to great challenges, it also meets property management issues with concessions and no increases at renewal. In many places, the levels of site traffic are down, but submarkets prevail in this business and the downgrading of REIT stocks in multifamily overplays the reality of future rent growth in some markets. Property prices are declining based on in-place rents and so future IRR considerations are vastly more complicated than ever before. With the downgrade of REIT securities, the vast number of shares shorted will be rewarded, but long term, apartments are stable.
Analysis
Apartment operating expenses are expected to rise above previously reported levels and the message here is that the sector is stressed. Well located properties with limited competition from foreclosures will ultimately outperform, but the industry as a whole, and the underlying securities are going to suffer for a while. The other side of the decline is the opportunity to acquire units at effective pricing and that's what is happening now. The amount of deal flow, just since the beginning of June has been up greatly over the past few months and opportunistic capital is coming back into the market. What we can expect is for the REITs to trim their operations even further, consolidate somewhat and emerge in the next cycle stronger and better financed. Small gains in operating income, albeit from property disposition activities will help soften declining net operating income, and we can expect to see more of that as the year progresses.
