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- REITs – A good Investment for Tishman Speyer Properties, But Is a REIT Right for You?

apartment complex under construction.jpgAs Tishman Speyer Properties and Lehman Brothers looks to close a deal for one of the largest residential REITs in the world, the Archstone-Smith Trust, you may be thinking “There're probably smarter minds at work there than between my ears. So they know something I don't?” Well you may be right, and they might. As the single family home market continues to cool throughout the U.S. real estate investors might look elsewhere to place their real estate investment dollars.

Traditionally, a cooling in the SFR market market has precipitated an increase in the apartment market. The market decline will probably only be accelerated by the recent troubles in the sub-prime mortgage market, which can only serve to thin the number of available buyers for single family residences. Might there be other reasons to investigate REITs as a comfortable resiting place for some of your portfolio? Well, just as a slump in the single family residential market may foreshadow a rise in the multi-family rental market, REITs have traditionally trailed the broader market in terms of appreciation.

REITs are, however, a fairly new instrument. The combination of factors we are experiencing today has yet to be experienced since the large variety of REITs that are now available have come into the marketplace. In New York City for example, apartment rents have actually increased for the first 4 months of 2007, with 2 bedroom units showing the strongest performance. This would lend credence to the supposition, in New York at least, that the apartment market will gain strength as home buyers are shut out of the market or must sell as their ARMs adjust upward.

In Phoenix, another once hot SFR real estate market, rents are up almost 5% over last year as some home buyers look to rent, rather than buy. According to RealFacts, the average apartment rent in the metro Phoenix area rose from $771 last year to $805 this year, clearly out pacing general inflation. There is also upward pressure on rental rates because investors are snapping up apartment complexes, then making improvements and raising rents to recoup their investment. Some investors make improvements with an eye toward future condo conversions. Although the trend toward condo conversions appears to be over for the present time, it isn't out of the question for the not to distant future.

Further west, in California's LA and Orange counties, apartment rental prices are up even more, an average of 7.2% over the same time last year. If you're looking to rent an apartment further north, say in San Jose, you'll fork out 12.1% more than last year for the same apartment. Still further north, in Seattle, be prepared to reach into your pocket for over 9% more cash every month than last year.

Rents are rising, what about available product on the market for renter to rent? Nationwide, there looks to be a large number of available units. The apartment vacancy rate stood at 6.1% for the first quarter of this year, the highest in almost 24 months. Part of the increase is due to the tightening in the sub-prime mortgage industry. The same pressure that's preventing people form buying homes and forcing them into the rental market is also putting rental inventory into the market, as buyers are unable to sell homes and condos. They are forced therefore, to put them up for rent or lose them to foreclosure. It's a relatively good time to make this choice for home owners, due to the rising rental rates in many major metro markets.

Well, do all these factors make it a good time to put your investment dollars into apartment oriented REITs? It depends. Generally, rising rents bode well for the market. On the other hand, increasing apartment vacancy rates do not. South Florida is especially poor in terms of increasing vacancy rates due to the number of condo projects that are now being converted to high end apartments, because of the condo market collapse there. The CREA REIT Review, a paper devoted to REITs (what else?) indicates that while apartment rental rates are rising, the rate of growth has leveled off. It also notes that while REITs in general have had strong performances recently, apartment oriented REITs have trailed the broader REIT market.

 
In fact, a Bloomberg index of 19 apartment oriented REITs showed a substantial 14% decline for the first quarter of this year. CREA recommends focusing REIT investment strategy on high barrier, coastal real estate markets that are earlier in their recovery cycle, such as Seattle and Northern California. As with any other investment, there are some nice, golden eggs to be found, but you must tear apart a few geese to find them. Go get your gloves.

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