The nation’s seven largest apartment REITs reported negative year-over-year changes in net operating income during the fourth quarter of 2002, according to Torto Wheaton Research. While low demand was roundly blamed for the sector’s 2002 malaise, a pervasive supply problem will make it harder for many apartment REITs to meet their earnings 2004 projections, especially in a dozen markets.

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Torto Wheaton’s "Dirty Dozen" high-supply markets were Denver, Austin, Charlotte, Raleigh, Orlando, Las Vegas, Phoenix, Jacksonville, Memphis, Seattle, Kansas City and Atlanta, where more than 17,000 new apartment units have hit the market since April 2000. Atlanta lost more than 34,000 jobs during that period.

REIT-owned properties in these high supply markets will see declining occupancies and negative rents through the end of 2003 and into 2004. Equity Residential Properties Trust and AvalonBay Communities, Inc. experienced the steepest declines in NOI between the fourth quarter of 2001 and 2002. AvalonBay also posted the single steepest drop in rental rates among the seven major apartment REITs: rents fell nearly 7% year-over-year for the REIT. United Dominion Realty Trust posted the lowest rental rate declines at –1.4%. REIT-owned apartment properties represent roughly 10% of all institutionally owned apartment real estate in major markets.

The report projects that REIT-owned apartment properties nationwide aren’t likely to see any tangible rent growth or rising occupancy through the first half of this year. And in over-supplied markets, there is little hope of employment growth keeping up with the rates of apartment completions this year, even as completion rates are expected to slow down.