Apartment Owners Fall as NYC, San Francisco Rents Seen Softby
Equity Residential says that new supply is hurting rent growth
Essex Property, AvalonBay, UDR shares hit by the warning
Apartment owners with properties in San Francisco and New York tumbled after landlord Equity Residential said new leases in those cities -- two of the most expensive U.S. rental markets -- are falling short of revenue expectations.
Essex Property Trust Inc., a real estate investment trust focused on the West Coast, slid 3.7 percent for the biggest decline since February. AvalonBay Communities Inc. and UDR Inc., which operate in both cities, dropped 1.9 percent and 2.8 percent, respectively.
Equity Residential, the largest apartment REIT by market value, on Wednesday lowered its revenue forecast for the second time this year, citing continued weakness in New York and a recent slowdown in San Francisco. The company said rates on newly signed leases aren’t meeting its projections because of an increase in supply. The shares fell 4.1 percent to $66.37, the lowest since October 2014.
San Francisco and New York -- favored markets for landlords and developers in recent years because of their outsized rent growth -- have had a surge in construction that may now be limiting how much owners can raise rates. In the West Coast city, where rents climbed 11 percent last year, about 5,100 new units -- the most in 26 years -- are expected to be listed for rent in 2016, data from Reis Inc. show. In Manhattan, 5,675 apartments will be added to the rental inventory, according to brokerage Citi Habitats.
San Francisco effective rents in the first quarter were unchanged from a year earlier at an average of $2,492, according to Reis. A slowdown in the city’s technology industry has also been affecting the market, said Ryan Severino, director of research at the real estate data company.
“Supply has been exceeding demand recently,” Severino said. “Job growth in tech year-to-date is about half of what it was last year.”
Essex Property owned 14,865 apartment units in Northern California at the end of the first quarter, representing about 30 percent of its holdings. That includes 2,349 units in San Francisco. An e-mail to Barb Pak, the company’s vice president of finance and investor relations, wasn’t immediately returned.
For Equity Residential, San Francisco accounted for almost 18 percent of net operating income in the first quarter, while in New York it was 19 percent.
The REIT in April cut its expectations for revenue growth because of New York weakness. Executives said in a conference call at the time that they expected conditions in Manhattan to improve in the second quarter, which is traditionally the most robust rental season as college graduates accept jobs in the city and have to find housing.
The company’s forecast reduction halfway through that heightened rental period suggests its rates are missing the mark, said Jonathan Miller, president of appraiser Miller Samuel Inc., which tracks the New York rental market.
“This is the peak leasing season,” Miller said. “I would find it hard to believe that there’d be any meaningful improvement from the current conditions.”
Landlords across the borough are working harder to attract tenants. In April, Manhattan renters were offered sweeteners, such as a month’s free rent or payment of broker’s fees, on 13 percent of all new leases, up from 2.7 percent a year earlier, according to a report by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate.