Which Are Good Markets
For Apartment Owners?
Where's a good market to own apartment buildings? Newark, N.J., believe it or not.
While New Jersey's largest city hardly seems an obvious choice, it actually ranks among the top-five markets where the cost of a monthly mortgage payment on a single-family home far exceeds the monthly rent for an apartment, according to a study by LaSalle Investment Management Securities, a Baltimore-based investment adviser.
In markets like this, the theory goes, the pool of potential tenants will be larger because more people will choose renting over home buying since the prices of the latter are so much higher. What's more, in these kinds of markets, an apartment-supply glut -- which would bring down rent prices -- is less likely because there's generally a lack of available land for apartment building and stricter zoning regulations.
The top-five markets where the gap between rents and median mortgage payments is the widest are Orange County, Calif., Newark, San Jose, San Francisco and Middlesex County, N.J. The five markets where houses are most affordable are Philadelphia, Atlanta, Houston, Dallas and Minneapolis.
The study, conducted by analysts Todd Canter and Ben Lentz, looks at how housing affordability impacts apartment-renting trends. LaSalle examined median home values, median income levels and rents in 47 markets, looked at median mortgages by market and compared these values to market rents for 15 apartment real-estate investment trusts. LaSalle used Economy.com, a West Chester, Pa., economic-consulting firm, for data on median income, home values and mortgage rates and apartment REITs for rent data.
The REITs facing the least competition from the single-family home market are Essex Property Trust Inc., Palo Alto, Calif.; Town & Country Trust, Baltimore; BRE Properties Inc., San Francisco; AvalonBay Communities Inc., Alexandria, Va.; and Apartment Investment & Management Co., Denver. These firms have large holdings in markets where mortgages are much greater than rents.
Meanwhile, the REITs most threatened by single-family home sales -- due to their exposure in markets where there's less disparity -- are Gables Residential, Boca Raton, Fla.; Post Properties Inc., Atlanta; Associated Estates Realty Corp., Richmond Heights, Ohio; Amli Residential Properties Trust, Chicago; and Camden Property Trust, Houston.
But less-affordable homes don't completely spell good news for apartment owners. They only partially offset the weak demand plaguing the apartment sector.
"There are multiple factors going on and the most powerful...is the weak economy," says Frank McDowell, chief executive of BRE Properties. About 70% of the firm's net operating income comes from California. "Southern California is probably one of the best multifamily markets in the country right now, but it's certainly not as good as it was 12 months ago."
Though AvalonBay made LaSalle's top-five list, its weakest markets have been northern California and the Pacific Northwest -- where home prices are high. Chief Executive Bryce Blair blames significant job losses in the technology sector and at Boeing Co. Last week, the REIT lowered its guidance for 2002 funds from operations -- a commonly used measure of REITs' financial performance -- to a range of $3.65 to $3.70 a share from an earlier $3.88.
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