Wednesday, February 04, 2009

BRE Properties: Beginning of "Two Year Declining Rent Curve"

by Bill McBride on 2/04/2009 04:32:00 PM

Here are some comments from BRE, an apartment REIT (hat tip Brian):

You know there really may not be an adequate description to frame what occurred during the fourth quarter with jobs and the nation's economy.

Our Enterprise priorities, like that of many real estate companies, lead with capital preservation and enhanced liquidity. And our tactical decisions are tied to the four key risks that we believe face our industry. First, the depth and duration of this recession, or depression, and the impact on operations and EBITDA; second, the availability and the cost of public capital both near and long term; third, the availability of secured debt from the GSEs; and finally transaction risks, or the ability to sell properties to source capital.
Did he she really just say "depression"?
Existing home sales have picked up and standing inventories have declined, but in most markets the level of inventory ranges between five and ten months. There does remain a favorable rent-to-own gap in most of our markets, but it is being challenged.

With jobs, we expect the first quarter to rival the fourth quarter with respect to job losses. We then expect to see a deceleration in the layoff momentum with job losses continuing early into 2010 before stabilizing. With respect to housing we expect to see a continued clearing of inventories and the possibility of a bottom in home prices identified in the second half of the year. And finally we believe foreclosures will continue into 2010, but become less of a factor once the market identifies the bottom for prices. We believe we are looking at a negative rent curve for the next two years.

We believe on a composite basis, market rents in 2009 could fall between 3 and 6% from peak levels in 2008. And the rent cuts in 2010 could be deeper, depending on how this next phase of the economy plays out.
Note that apartments typically compete with lower priced homes. So when he is talking about a price bottom, he is talking about pricing in some lower priced neighborhoods with significant foreclosure activity.

On New Development:
In early January, we announced the deceleration of our development program. We recorded a 5.1 million, non-routine charge to abandon three sites we had under control, two in the Inland Empire and one in San Jose.
...
The past quarter was an inflection point. The level of economic deterioration was strong enough to render certain [development] sites across the industry infeasible.
So they are cutting back on new development. And they are being hit by job cuts in retail:
Operationally we are facing the toughest conditions in decades. As planned, since October, we have cut market rents more than 3% across the portfolio, with the deepest cuts in Southern California. We are seeing decent traffic and focusing on resident renewals and aggressive leasing to solve for occupancy.
...
the job numbers for the fourth quarter and year end go beyond bleak. ... The headline is the retail impact. Retail job losses are at the top of most of our core markets. Many retail workers' rent, and these layoffs trigger higher move-outs and terminations; and we don't get the feeling the retail industry is finished with their job cuts.
And on the Seattle market:
Seattle is no longer immune to the economic fallout. During the fourth quarter Seattle shed 16,000 jobs or a drop of 1% in 90 days as market dropped all the job growth experienced in the first nine months of the year, bringing employment back to December '07 levels. During the fourth quarter the Washington Mutual job cuts kicked off, and in January Microsoft laid of 1,000 workers. Boeing announced it will cut 10,000 jobs, half of those in Seattle, and Starbucks announced another round of layoffs, estimated at 1,000 jobs.

Certain sub-markets have already been impacted. Downtown rents have fallen almost 9% in the fourth quarter and are continuing to drop.
And on households "doubling up":
Q: Can you just address with the drop in occupancy and the employment losses ... what's your sense in terms of where are people moving? Are they going to lower quality units, are they doubling up, going with parents, I mean, where are people going?

A: ... I think it's pretty similar to past cycles. ... while there's some exodus of households out of California the numbers aren't that great, so it would indicate that people are doubling up, tripling up, moving back to couches, moving back with mom and dad.
They also noted that there will probably be few apartment transactions this year:
I don't think anybody feels a real sense of urgency to jump in and buy at the beginning of a two year declining rent curve. I think we'll probably see transactions begin to move up in the first half of '10 as you get closer to the end of that declining rent curve.