Development as an opportunity
Equity Residential (EQR) sees property development as an excellent opportunity to build new streams of income when it’s difficult or impossible to acquire existing properties in its urban core markets. Other major apartment REITs like AvalonBay Communities (AVB), Essex Property Trust (ESS), and UDR (UDR) are also active in property development projects. Equity Residential accounts for 6.70% of the iShares Cohen & Steers REIT ETF (ICF).
Currently, Equity Residential has a development pipeline of over $3.1 billion. In 2014, the projects under development totaled $6.7 billion—compared to $4.76 billion in 2013. The starts in 2014 of ~$1.2 billion were primarily driven by several land sites that the company acquired in early 2013 in San Francisco and Seattle.
In 2014, Equity Residential completed six new developments containing 1,542 apartment units in Seattle, southern California, Washington DC, and south Florida. When fully stabilized, the company expects these assets to deliver yields of 6.50% on the cost. This was higher than the prevailing average cap rate of 4.50%. Currently, the company is also delivering two new assets in Manhattan—Prism at Park Avenue South and 170 Amsterdam.
Not adding new sites
Due to the high cost of land and rising construction costs, Equity Residential isn’t adding new sites to its inventory at the same pace that it’s starting new construction. As a result, the company’s development activity reduced to a historical level of ~$500 million of annual starts.
With the higher rental demand for its assets, Equity Residential sees unit renovations and rehabilitations as another area of significant value creation. The company spent more than $51 million, or $8,400 per apartment unit, on renovations and rehabilitations to its existing assets in 2014. These projects are primarily kitchen and bath renovations that keep the assets competitive in the marketplace while delivering higher returns on invested capital. Equity Residential plan to spend ~$60 million, or $9,000 per apartment unit, on additional projects in 2015 with similar return expectations.
In the next part, we’ll discuss Equity Residential’s strategy.