Landlords Offer Incentives to Stay Put

Amid the jobless recovery, some landlords are showering flat-screen
TVs, cash, rent cuts and other incentives on tenants to encourage them
to renew their apartment leases and thus avoid the expense of filling
empty units.

The rise in unemployment has prompted tenants to seek roommates,
move home or trade down to cheaper units. In the third quarter, the
national apartment-vacancy rate hit 7.8%, a 23-year high, according to
Reis Inc., which tracks vacancies and rents in the top 79 markets.

"Many companies are doing whatever they can to keep units occupied,
especially heading into the seasonally slower leasing period," said
Paula Poskon, an analyst with Robert W. Baird & Co.

The trends are taking a toll on the bottom line. Apartment
Investment & Management Co., which owns and operates roughly
150,000 units nationwide, reported Friday that its funds from
operations, a key REIT metric, fell to 19 cents a share from 60 cents a
year earlier. UDR
Inc., which has about 45,000 units on the West Coast and in Washington,
D.C., reported earlier this month that its funds from operations
dropped 42% to 19 cents.

"We do need job growth in order for our business to prosper," said David Neithercut, chief executive of Equity Residential, the country's largest apartment REIT by market capitalization. "I think 2010 will be another year of doing the best we can."

Some of the large REITs were able to keep their occupancies up. UDR
managed to increase occupancy to 95.6% from 95% a year earlier. Colonial Properties Trust, which operates 35,000 Sunbelt apartments, said its third-quarter occupancy fell to 94.4% from 96%a year earlier.

Landlords attracted and retained tenants by offering incentives and
rent cuts. Equity Residential said new tenants in the third quarter
paid 9% to 10% less rent than the previous residents. AvalonBay Communities Inc., an upscale operator, said its decline was about the same.

Owners are focusing on keeping existing tenants because when
apartments become vacated they can sit empty for months and often
require marketing, painting, brokerage commissions and other expenses
to attract new tenants. Denver-based UDR is offering renewing tenants a
flat-screen TV, new carpet, kitchen upgrade or, $300 in cash. The money
is the most popular choice, said Chief Executive Thomas Toomey,

Mr. Neithercut said Equity Residential doesn't initially offer rent
cuts to existing tenants to persuade them to renew. But if the tenant
plays hardball, the company asks: "What can we do to keep you?" he
said.

One problem for landlords is that existing tenants can easily check
the Web to see what deals new tenants are being offered. And new
tenants are getting incentives like a waived pet deposit or two months'
free rent.

Some landlords have also become more open-minded about tenants with
credit issues involving home foreclosures. In the past, a foreclosure
on a credit record could have meant an automatic denial. Now such
blemishes are so commonplace that the stigma is easing. Equity
Residential looks for reasonable credit history "outside of a problem
that they've had with a single-family home," Mr. Neithercut said.

Another sign of the times: In New York City, landlords are paying
broker fees. Typically in New York, which has traditionally been a
tight rental market, tenants have to pay fees as high as 15% of a
year's rent. But so far this year, Equity Residential has paid about
$1.5 million in such commissions.

Apartment landlords say that one benefit of the bad market is that
it has practically halted new construction. New completions are
expected to be 98,000 next year and 109,000 in 2011, compared with
188,000 last year and 204,000 this year, according to Green Street
Advisors Inc.

When loss rates are taken into account—the removal of units because
of obsolescence—the actual addition will be immaterial. That means that
when the economy rebounds, the supply will be tight, increasing
landlord profits.

"I have utmost confidence in our ability to be successful when we
get to there," said Mr. Neithercut. "I just don't know how far away
'there' is."

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