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REITs Begin to Break Ground

APARTMENT FINANCE TODAY • May/June 2010

BY Jerry Ascierto

PUBLIC REITS ARE POISED to break ground on as much as $1 billion in new development this year in another sign of industry confidence that fundamentals are improving.

Last year, public REITs started just $100 million in new apartment construction, a steep fall from the average of $1.5 billion seen annually between 2000 and 2008.

But multifamily REITs are growing aggressive, issuing guidance that they will collectively begin between $600 million and $700 million in new projects this year. The bulk of that figure—$400 million— comes from Alexandria, Va.- based AvalonBay Communities, which plans to break ground on seven communities this year. Meanwhile, Chicago-based Equity Residential, Houstonbased Camden Property Trust, Highlands Ranch, Colo.-based UDR, and San Francisco-based BRE Properties may also commit to more new development as the year goes on, which would bring the total figure up to a whopping $1 billion.

“Most REITs spent the past 12 to 18 months solidifying their balance sheets, and they also feel more confident in the eventual recovery,” says Andrew McCulloch, a senior analyst at market research firm Newport Beach, Calif.- based Green Street Advisors. “For any REITs that were on the fence with certain projects, we expect them to put the shovel in the ground later in the year because fundamentals in the first part of this year have surprised people—rental demand is firming up quicker than people expected.”

Yet, what AvalonBay is planning still speaks to a cautious, scaled-down approach. “A lot of what AvalonBay’s doing is mostly suburban, garden developments in markets they’re already in, such as in the Northeast,” McCulloch says. “It’s a very specific product type with lower-risk characteristics.”

One of the main attractions to building now is the fact that developers will be delivering units in a supply-constrained and not-too-distant future. “They want to be delivering when fundamentals are really getting hot—in the 2012 period,” McCulloch says.