As if the apartment market needs further proof that it is about to emerge as the best performing industry in this down economy: two of America’s largest apartment REITs have yielded better-than-expected funds from operations. Furthermore, both companies raised the bar by increasing its outlook for the year 2010. This just intensifies the recent reports of an improving – if not improved – apartment market.
Both AvalonBay Communities Inc. and Equity Residential (whose chairman is real estate mogul Sam Zell) saw an increase in their year-over-year rental revenue. Given a boost in morale, both have also pushed their rents at expense of occupancy.
The increase in apartment demands has been brought about by more and more people choosing to move out of their parents’ house or to live on their own without a roommate, says Adelante Capital Management vice president Luis Sanchez. The influx of foreclosures has also contributed to the decrease in vacancy rates – evicted homeowners choose to just rent and prospective home buyers are scared out of purchasing thus going with rental.
Vacancy rate in the third quarter of this year is the lowest level since the first quarter of 2009. It registered at 7.3%, reports real estate research firm Reis.
Funds from operations, or FFO, measure a real estate investment trust by removing the profit-reducing effect that diminishes earnings. Chicago-based Equity Residential marked a 7.6% increase to $166.2 million in its FFO, which is equivalent to 55 cents per share. Thomson Reuters reveal that analysts only forecasted 54 cents per share.
Because of this, the fourth quarter forecast for Equity Residential ranges from 56 cents per share to 60 cents per share. Analysts peg it at 57 cents per share. AvalonBay, on the other hand, expects a range of 98 cents per share to $1.02 per share; Wall Street places its forecast at $1.00 per share.
“The trend is continuing to be favorable for them, but the big question on people’s minds is how much that continues in 2011 absent better employment growth,” says Luis Sanchez.