The housing market has been somewhat fickle over the past year or two, sputtering and stalling until finally getting into gear over the past few months. Not surprisingly, many real estate investment trusts have been affected by all aspects of the housing market lows and nascent recovery — particularly those involved in renting property, and, in a new twist, those buying the foreclosures littering the landscape of the housing bust.
But it’s not just a residential issue. The downturn in housing caused another casualty, particularly in New York City: office rentals. As Wall Street firms contracted in the wake of the mortgage meltdown, vacancies went unfilled — a real problem for business property REITs.
Both the residential and business rental markets are changing, affecting three REITs that operate in different areas of property investment: apartment complex REIT AvalonBay Communities, Inc. (NYSE:AVB), office property manager Brookfield Office Properties Inc (USA) (NYSE:BPO), and newcomer Silver Bay Realty Trust Corp (NYSE:SBY), which invests in single-family foreclosures.
AvalonBay: feeling the pinch as housing improves
Big apartment REIT AvalonBay Communities, Inc. (NYSE:AVB) has had a busy year, the effects of which recently showed up on its fourth-quarter earnings report. Superstorm Sandy expenses weighed on the company’s balance sheet, as did acquisition costs for its recent purchase, with partner Equity Residential (NYSE:EQR), of former Lehman Brothers property portfolio Archstone.
It was more than these one-time charges that caught investors’ attention, though, causing the stock to fall a little each day since AvalonBay reported earnings on Jan. 31. In a conference call following the earnings release, CEO Timothy Naughton indicated that rising single-family home sales and home prices may prompt more tenants to become homeowners, curbing the advantage that apartment owners have had over the past few years, when many chose to rent rather than buy. In addition, new units in AvalonBay’s market, particularly along the coast, will be available this year — a bit ahead of schedule, putting unexpected pressure on the REIT.
Brookfield Office Properties Inc (USA) (NYSE:BPO) gets its groove back
On the subject of rentals, things are looking up for office space in the Big Apple. Just a few short months ago, office REITs like Brookfield were concerned about the lack of growth in their sector. Lately, though, things have been looking up. Brookfield’s stock has risen precipitously ever since management announced that it is in the latter stages of signing tenants for approximately half of the 3 million square feet that’s expected to become available by the end of this year.
The huge office rental company expects two tenants to take over 1.5 million square feet at its Brookfield Place location in Manhattan, formerly known as the World Financial Center. The space is currently being rented by Bank of America Corp (NYSE:BAC), which acquired the leases along with its takeover of Merrill Lynch in 2009.
Silver Bay: A newcomer with potential
Spun off from Two Harbors Investment Corp (NYSE:TWO) , Silver Bay specializes in buying up foreclosed single-family homes, renovating them, and renting them. Though newly settled in on the big board, the success of the model can be seen through the frenzied acquisitions of the The Blackstone Group L.P. (NYSE:BX), which can’t seem to get enough of these types of homes.
Will a recovering housing market be kind to companies like Silver Bay? Time will tell, but it is interesting to note that one of the first Wall Street firms to jump on this trend was Och-Ziff Capital Management Group LLC (NYSE:OZM) , which accumulated about 300 houses in northern California before announcing last fall that it would like to sell its portfolio, according to Reuters.