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."
The largest sources of financing for apartments are the government-owned mortgage finance companies Fannie Mae and Freddie Mac, said Sam Chandan, president of research firm Chandan Economics.
"Their books of business are performing very well," Chandan said.
"Even under conservatorship, Fannie and Freddie have taken the lead in supplying credit to the multifamily sector.
The availability of credit has, in turn, supported property sales and prices."
At banks, the default rate for multi-family mortgages was 2 per cent of outstanding loan balances in the second quarter, down from a peak of 4.7 per cent in 2010's first quarter, he said.
Chandan estimates the bank default rate will fall to 1.5 per cent by year's end. Before the global credit crisis, the default rate for banks' multi-family loans was about 0.3 per cent.
The Bloomberg Apartment REIT Index, led by Equity Residential and AvalonBay, almost quadrupled from its March 2009 low to its July peak this year, before its decline wiped out the gains for 2012.