US apartment stocks on the rise after Sam Zell's deal for Archstone

Sam Zell's Equity Residential and AvalonBay Communities are drawing investors back to apartment stocks four months after their best days looked to be behind them.

Their surprise US$16 billion deal last week to acquire Archstone from Lehman Brothers Holdings ended a plan by the defunct investment bank for an initial public offering of its biggest asset and halted a 13 per cent slide in apartment stocks since their July peak.

The slump was driven by concern that rising homeownership and new construction would weaken landlords' power to raise rents as a mammoth share sale flooded the market.

"The storm cloud has been lifted with the cancellation of the IPO," said Dean Frankel, senior portfolio manager at Urdang Capital Management, a unit of Bank of New York Mellon that oversees about US$6.3 billion of real estate securities globally.

Household formation is still increasing demand for rental housing and the tepid pace of US job growth suggests homebuying remains out of reach for many.

Whether the apartment market gets overbuilt depends partly on lenders, said Gleb Nechayev, senior managing economist at CBRE Econometric Advisors, the forecasting unit of commercial broker CBRE Group. "We expect the rental market to remain strong and the big question on everyone's mind right now is how aggressive will development get?" said Nechayev.

"If new construction remains disciplined, the market can ride this wave for a fairly long time."