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Storage and apartment REITs are still faring better than the
broader sector. While storage REITs have declined 4.3% this year
and apartment REITs have fallen 14.15%, the overall sector is
down 29.6%. Meanwhile, the S&P 500 Index is down 38%. "A lot of
households are really concerned about the future of housing
prices and mortgage interest rates, so they're going to wait it
out and rent, and while they're renting, they need a place to
store their extra stuff," said Brad Case, vice president for
research and industry information at NAREIT.
ALL may not
be completely grim in the investment world.
Even in the throes of what some are calling the worst financial
crisis since the Great Depression, some real estate investment
trusts — those owning apartment buildings and self-storage
facilities — have held up better than most stocks.
For the year through last Thursday, the storage sector was down
by 4.3 percent, while apartments slid 14.15 percent. The broader
universe of equity REITs, meanwhile, suffered a 29.6 percent
decline, while the Standard & Poor’s 500-stock index plunged 38
percent.
And during the third quarter, in fact, the storage and apartment
sectors actually posted strong gains. The storage REITs surged
19.3 percent, on average, for the quarter, and 33.8 percent, on
average, for the first nine months of the year, according to the
National Association of Real Estate Investment Trusts. Apartment
REITs rose by an average of 12.5 percent for the quarter and
17.4 percent for the first three quarters, the association said.
All property REITs, by comparison, had an average quarterly gain
of 5.5 percent.
Why were investors buying up shares of these REITs while
steering clear of so many other stocks? In part, these
categories were undergoing an upward correction, real estate
analysts say, after suffering big losses a year or so ago.
But the analysts offered another simple answer as well: safety.
“They want to hide there right now,” Louis W. Taylor, a managing
director at Deutsche Bank Securities, said of investors’
mind-set.
REITs — publicly traded companies that disburse most of their
income as dividends — are often considered a good portfolio
diversifier, and a haven in turbulent times, because they
typically have a “low correlation” with broader markets. In
other words, REITs might rise as the overall stock market
declines, as happened in the third quarter, or not fall as
precipitously.
But investors also see the problems in the housing and mortgage
markets, which helped prompt the recent burnout on Wall Street,
as particularly beneficial for self-storage and apartment
companies, analysts say.
“A lot of households are really concerned about the future of
housing prices and mortgage interest rates, so they’re going to
wait it out and rent,” said Brad Case, the vice president for
research and industry information at the REIT trade association,
“and while they’re renting, they need a place to store their
extra stuff.”
(Occupancy rates for multifamily rentals have remained stable,
averaging in the mid-90-percent range, industry reports show.
Homeownership, meanwhile, slipped to 68.1 percent at the start
of the third quarter from a peak of 69.2 percent in 2004,
according to the Census Bureau.)
Also helping both property sectors, as well as commercial real
estate in general, is tighter supply. “There’s not a lot of new
construction, really,” Mr. Case said. “The last construction
boom we had was in the ’80s, with the exception of offices in
the late ’90s, partly because construction costs have been
relatively high and now financing is relatively expensive.”
Apartment REITs, in particular, have a clear advantage over most
other real estate companies in getting financing. While many
businesses have been affected by tighter credit, the operators
of multifamily homes still have ample sources of capital
available from Fannie Mae and Freddie Mac, despite the recent
government takeover of the two mortgage companies. “Fannie and
Freddie are still very active apartment lenders,” Mr. Taylor
said. “The other sectors have to rely on the banks and
insurers.”
Just last month, for example, Camden Property Trust announced
the closing of $380 million in secured credit from a Fannie Mae
lender.
At the same time, Mr. Taylor added, many apartment operators
have kept expenses down as tenant turnover has slowed, which
means that they are spending less on things like advertising,
repainting or replacing carpets. He noted, for instance, that
AvalonBay Communities, a company for which he has a positive
outlook, has had flat expense growth this year, compared with a
2 to 3 percent increase during typical years.
Michael J. Salinsky, a senior REIT analyst at RBC Capital
Markets, also favored AvalonBay, along with BRE Properties and
Essex Property Trust, which have a concentration in Western
states. “On the West Coast you have a very, very wide gap in
housing prices,” when compared with rental rates, Mr. Salinsky
said. He noted that there had also been solid job growth in many
cities in the region, which helps to maintain occupancy levels.
Mr. Taylor agreed. “The markets that have done the best this
year have been Seattle and Northern California,” he said, where
the economies are relatively stable.
To pinpoint the regions where self-storage operators have done
well, however, investors can look at the other end of the
economic spectrum.
“The self-storage REITs did the best in regions that had the
worst housing markets, like Detroit,” said John Coumarianos, who
follows real estate for Morningstar, the mutual fund tracker.
“If you owned a self-storage business in Detroit, you’re doing
great.”
Michigan, in fact, had the nation’s fifth-highest rate of home
foreclosures in August, according to a report last month from
RealtyTrac, which follows home foreclosures.
The higher the foreclosure rate, some investors reason, the
higher the demand for storage space as people must find places
to store their belongings when they move into apartments or
smaller houses.
But the fortunes of the self-storage industry go beyond the
economy. “Any sort of disruption in a person’s life, be it
positive or negative — marriage or divorce, job loss or job gain
— could give rise for the need for self-storage,” said Paul
Adnorato, a REIT analyst at BMO Capital Markets.
Still, if the economy becomes too bad, he said, the self-storage
sector could be hurt as well. “I think people will re-examine
their discretionary spending,” he said. And if land prices
continue to slump, “that could create more development” of
storage structures, Mr. Salinsky added. That would hurt business
for current facilities.
At the top of many analysts’ lists of self-storage REITs is
Public Storage. The company has recovered nicely from the
difficulties it encountered early in its integration of Shurgard
Self Storage, which it bought two years ago, analysts say.
“Today it has virtually no debt,” Mr. Taylor said, “and it also
has $800 million in cash.”
He said he also likes U-Store-It Trust, which had its own set of
issues trying to absorb portfolios of private property it
recently bought, “but they’re finally getting integration behind
them.”
Mr. Salinsky, meanwhile, favors Extra Space Storage, because
technological upgrades have improved its operations.
So the question remains: Should investors stock up on shares of
self-storage REITs, or apartment REITs as well?
Analysts offer diverging views. Mr. Salinsky said he thinks that
“valuations in both sectors are a little rich,” but for Mr.
Taylor, “the stocks are really priced for perfection right now.” |
