Associated Estates Realty Corporation
Of the nearly 30 publicly-traded multifamily apartment REITs, we are the only one with a primary focus in the Midwest. Those who are students of demographics recognize, as we do, the stability and predictability of this market. Nevertheless, we also recognize the financial risks of being too concentrated in one market and have continued to expand and diversify our geographic focus. When we went public in 1993, 100 percent of our portfolio was located in northeast Ohio. At the end of 1997, 52 percent of our portfolio was located in northeast Ohio while another four percent of our portfolio was in northwestern Ohio, 22 percent was in central Ohio, one percent was in southern Ohio, 15 percent was in Michigan, three percent was in Indianapolis, Indiana, and three percent was in Pittsburgh, Pennsylvania.
While we continue to be committed to the Midwest, we are also looking at markets outside of the Midwest where we can find similar opportunities on a going forward basis. As a result, in January 1998, we announced plans to acquire privately-owned MIG Realty Advisors, Inc., one of the nation's preeminent multifamily asset managers and advisors to institutional real estate investors. In connection with the acquisition, we expect to acquire 11 properties containing 2,734 suites located throughout the United States that are currently managed by MIG. The properties are located in Arizona, California, Florida, Georgia, Maryland, Missouri, North Carolina, and Texas - markets with higher economic growth expectations than the Midwest; three of these properties containing a total of 1,004 suites were acquired in February 1998. The transaction also contemplates the acquisition of up to three development properties in Florida containing a total of 1,216 suites. Following the anticipated merger, we expect to continue to manage on behalf of MIG approximately 25 multifamily properties located throughout the country for third-party pension funds and other institutional investors. In many cases, the managed properties are located in close geographic proximity to the properties we expect to acquire, which enhances operational efficiency.
Going forward, we will deploy our capital in two distinct markets: the first is what we identify as "continuous markets;" that is, markets with a diversified economy, a long trend of growth, and a deep apartment market. These are markets where we intend to be active on a regular basis, such as Columbus, Ohio; Atlanta, Georgia; south Florida; and the greater Washington, D.C. area. We will seek to continuously acquire in these markets, based on market research that will drive the timing and pricing at which the pace of these acquisitions takes place.
The second is "opportunistic markets," those where we see a strategic opportunity because of potential growth and good buying opportunities. Acquisitions in these markets will be more concentrated in short time periods while opportunities exist.
When evaluating whether to expand in new or existing markets we consider the relationship between several demand factors, including employment growth, economic diversification, population growth, household formation and income growth, and supply factors, including the number of building permits issued and the number of new rental construction starts. In determining the demand for rental properties in a market, we evaluate the factors in each market with respect to the propensity and ability of the population to rent, as each market exhibits very different characteristics. For example, among all U.S. households, 36.3 percent reside in rental housing, yet the figure varies from 25.5 percent in Charlotte, North Carolina to 52.3 percent in Los Angeles, California.
Once we've established the potential demand for apartments in a market, we focus on specific opportunities by further analyzing proposed locations, rent levels and amenities. While the number of building permits issued or starts may be a predictor of excess supply, the data does not always tell the whole story.
Obviously, if the growth rate in the supply of new apartments in a market exceeds the demand, vacancies may increase and it may be difficult to raise rents on existing apartment homes. Unchecked overbuilding in the U.S. during the 1980s has given way to a more disciplined market in the 1990s, making supply changes more predictable. As a result, we think the multifamily apartment market, on a national basis, can generally be characterized as being in a state of equilibrium.
Regional trends are reflected in our ability to maintain historical occupancy levels in the range of 93 to 95 percent and to increase rental collections at the market-rate properties. In northeast Ohio, our largest market, average economic occupancy remained relatively stable at 93.4 percent for 1997 compared with 94.5 percent in 1996, while rental collections increased 1.4 percent. In central Ohio, average economic occupancy slipped to 94.4 percent in 1997 compared with 96.1 percent in 1996, while rental collections increased 1.1 percent. These trends reflect a modest oversupply in Columbus; however, the region continues to be among the fastest growing areas in Ohio. And in Michigan, our average economic occupancy was 95.3 percent in 1997 compared with 96.8 percent in 1996, while rental collections increased 1.3 percent.
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