Rents are flat or down. Lending is stagnant. Development seems undoable. Concessions abound. At first glance, 2010 looks like it will be a lot like 2009: a 365-day survival of the fittest exercise in waiting for property and business fundamentals to rebound. Economic and industry experts alike anticipate great years ahead for multifamily, with a surge in rent-friendly Gen Y demographics coinciding with job creation and a lack of apartment supply culminating in a long run of rent increases, occupancy hikes, and all-around good times.
To get a seat at the table, however, multifamily operators still need to apply mettle to the realities of 2010. With that in mind, we asked industry leaders across the property management, development, REIT, and owner/operator sectors for their firms’ indispensable strategies for navigating 2010. Here are 20 tenacious tactics for coming out on the other side.
Development and Design
1 Anticipate the Return of Development.
Yes—believe it or not—multifamily developers are beginning to again take chances on breaking new ground for apartment community construction. True, both the costs and risks associated with development are paled by the comparatively simple process of addition by acquisition, but development has one key advantage: delivering brand new product into supply-constrained markets between 2011 and 2015.
“Development starts in the second half of 2010,” says Highlands Ranch, Colo.-based UDR president and CEO Tom Toomey. “We will look at our pipeline of opportunities and challenge ourselves to start them because they are three years out before they are leasing. Anyone who has the financial wherewithal to start building today is going to face a great environment when they deliver that asset two or three years down the road.”
Likewise, Houston-based Camden Property Trust has several projects—notably in the Washington, D.C., market—that will likely go active in the latter half of the year. “If I started those projects in mid-2010, I would deliver at the end of 2011, beginning of 2012, and those could be pretty nice markets then,” says Camden chairman and CEO Ric Campo. “The demand side of the equation we think will be improved by then, and if you want to deliver into that market, you better start building in 2010.”
2 Prepare the Pipeline.
It’s not just big national REITs geared up for development, either. Both Irvine, Calif.-based Western National Property Management and Chicago-based RMK Management broke ground on new multifamily stock at the end of 2009 and are identifying additional opportunities for 2010. At Trammell Crow’s Dallas-based High Street Residential, division president Art Lomenick likewise says his team will start to turn dirt this year. “We do expect to have at least two starts in 2010. It doesn’t sound like a lot,” Lomenick says, “but we’ll also be putting opportunities into a shadow pipeline to begin preliminary planning for additional development in 2011 and 2012.”
The shadow pipeline concept—preparing properties from a land purchase and entitlement standpoint and even seeking out lending despite ultimate uncertainty on delivery—is clearly en vogue among the progressive development set as players posture for market opportunities. “We have that building coming out of the ground as we speak,” says RMK executive vice president Diana Pittro. “It will deliver in May 2010: a brand-new, 221-unit building in downtown Chicago. We also have a couple of other deals in the works for 2010, but we are still in search of a lender.”
The Bozzuto Group has also identified shadow pipeline possibilities—particularly as they involve land deals—that could conceivably begin next year. “We have three or four in the pipeline like that,” says the Greenbelt, Md.-based company’s CEO Tom Bozzuto. “I don’t think construction will start on them until 2011, but that’s still terrific because that has deliveries occurring in 2012 and 2013 when I think the economy will have rebounded and the demographic bubble will really be hitting the apartment business.”
3. Find Land Deals.
Integral to the Bozzuto development pipeline plan is the availability of buildable land, where current pricing is again keeping most players far from the market until sellers enter financial distress or otherwise come down from 2007 pricing. “I do think there are some selected opportunities out there where land sellers are recognizing that their land is not worth what they thought it was two and three years ago,” Bozzuto says. “If you can put together the proper deal structure, you could probably begin to work on construction.”
UDR, as well, is combing submarkets for entitled parcels, and CEO Toomey says his company will deploy dry powder for suitable deals in 2010 to get an edge on market competition and avoid bid-ups. “We don’t think a lot of people have the financial strength to buy in that area,” Toomey says. “As a result, you probably can get a better bargain.”
Still, others will stay the course and focus on acquisition opportunities until land prices reset, particularly in extreme high-barrier and high-cost markets. The dearth of construction lending, as well, has most on the sidelines in 2010 waiting for brighter days ahead. “Regardless of pricing, land today is worthless,” says New York-based Simon Development principal Matthew Baron. “There is simply no financing for it, and in 2010 through 2011, I can buy finished buildings for less than what it costs to build them. Why would I go through the headache of buying a piece of dirt, designing the building, and taking the construction risk when I can buy that building today?”
4. Rethink Your Product.
Green buildings could be a function of demographics as much as anything else in 2010 and the years to follow, and several developers are questioning status quo design at both the site and unit level as they consider groundbreaking possibilities in the next 12 months. “If you look at dormitories, fewer and fewer college kids live in shared space anymore,” Bozzuto says. “When those students become multifamily prospects, they aren’t going to want to share apartments. Perhaps we need to start building more one-bedroom apartments—maybe even more junior units.”
The Gen Y set is also expected to fly back into urban centers as an alternative to the suburban sprawl of their youth, further benefiting multifamily players with assets in the inner urban rings. “The Echo Boomers have a different currency than their parents,” says Orlando, Fla.-based ZOM Residential’s president Steve Patterson. “They don’t want the biggest cars and the biggest apartments; they just want to live in a city with a good quality of life.”
The economy in and of itself could demand a shift in product type among multifamily developers. Extremely conservative underwriting and strict lender requirements will likely demand equity-heavy projects for some time, placing fatter developments in need of heftier bridge and mezz financing on the back burner. “Projects are going to be smaller,” says High Street Residential’s Lomenick. “They have to be scaled back because we are still going to have a problem with construction debt.”
High Street will consequently focus on smaller niche development opportunities in 2010, looking to track what Lomenick calls a core paradigm shift in multifamily development. “We’re looking at walkable environments, urban environments, environment near transit modes,” he says. “The days of garden apartments on the outer ring of the suburbs are over.”
ACQUISITIONS AND INVESTMENT
5. Don’t Turn Your Back on Acquisitions.
Multifamily portfolio manifestos will continue to march to the call of distressed acquisition opportunities in 2010. How firms define that opportunity, however, is uncertain as the once-expected tsunami of deals hitting the market proves to be more fickle and less flood. Yes, some $300 billion in multifamily debt will come due over the next three years, but belief in a full-out property dump is waning as signs of an economic recovery begin to appear.
“Anyone selling right now is in some form of distress; otherwise, why would you sell anything today?” Simon’s Baron asks. “There’s hundreds of billions of dollars of commercial debt maturing every year into 2012 that will attempt to refinance with stricter underwriting and lower valuations. No matter which way you slice it, people are going to have to come up with more equity—some of them will be able to, some of them won’t—and that is going to create opportunities for acquisitions.”
While buying off of trough earnings in high-barrier-to-entry markets could produce discounts of 25 percent to 35 percent off peak values, many in the industry question whether or not higher-end assets will be available in the 2010 disposition market. That has REITs such as UDR anticipating rehab opportunities over crown-in-the-jewel buys, despite the company’s fortitude and hunger for larger deals.
“We just think there will be a scarcity of Class A product available next year,” says Larry Connor, president of Dayton, Ohio-based owner/operator The Connor Group, which closed on $170 million in acquisitions in 2009. “Unless you’ve got a gun to your head, you are not going to sell.”
6. Know that Cash is Still King.
Simon’s Baron says construction loan qualifications effectively shut most borrowers out of the debt markets, necessitating a dry powder strategy for 2010 multifamily market movers. “I don’t want to say there is no construction financing out there, but it is effectively a cash business today,” Baron says. Even on the acquisition side, deal preference is migrating to cash-in-hand buyers who can guarantee speed of execution and certainty of closing over those seeking to access agency lending as part of their acquisition strategy.
“We’re sitting on $80 million in cash, an untapped $600 million line of credit, and an investment fund of approximately $1 billion in acquisition/development capacity,” says Camden’s Campo. “The most important part of preparation for 2010 is making sure you have the capital.
Even among private, regional companies, the M.O. for 2010 is stack and attack, and the industry seems poised to deploy capital as soon as there is a semblance of normalcy to the transaction market and a bottoming out of rent fundamentals. “We just closed a fund of $200 million in equity that is liquid and available to us to acquire and develop multifamily real estate,” says Western National president Thomas Shelton. “There have just been a few transactions, and value is still bouncing around the board. We have expectations on the returns that we need to make, and as soon as we see the prospect of those returns, we will invest accordingly.”
7. Expect Cap Rate Compression.
With gun-to-the-head mentality among sellers still a somewhat rare market event, bid/ask spreads remain preventively wide in terms of fostering a healthy transactional environment for multifamily apartment stock. The oft-mentioned disconnect between buyers and sellers as a hindrance to deal flow is expected to close in 2010, and it’s not just sellers that will be moving the gap. Multifamily properties currently on the block are fetching 20 or 30 bids per go, and that kind of interest—coupled with an uptick in volume—is the perfect recipe for cap rate compression.
“You are starting to see evidence of buyer appetite for good quality, relatively low-risk properties on the market at more reasonable prices,” says Marcus & Millichap managing director of research Hessam Nadji. “On good quality assets in primary markets, we are receiving 20 offers with cap rates compressing 30 to 50 basis points based on buyer competition alone.”
Absent hikes in interest rates and the deployment of capital in the acquisitions and disposition market could even push cap rates down to pre-recessionary levels. “When things start getting better, you’ll find that there are a lot of people out there willing to buy assets at cap rates not different from what we have seen in the past,” says ZOM’s Patterson. “I don’t subscribe to the belief that we are going to see cap rates rise 100 basis points: We already see quality deals selling now at 6 percent cap rates.”
8. Locate Lending.
Executing on acquisition deals, regardless of cap rates, will still necessitate debt financing for many. That financing is still likely to come from Fannie Mae, Freddie Mac, or FHA multifamily lending programs, and even those dependent on agency debt are looking at stricter underwriting requirements and more stringent loan terms. Likewise, banks re-entering the multifamily debt markets—whether for acquisition or even new development—have reset the bar on underwriting and leverage expectations.
Mike Peter, CEO of Austin, Texas-based Campus Advantage, echoes an industry chorus when he says it’s time for multifamily players to simply expect those lending realities. “Leverage ratios are changed, and the guarantees that lenders are requiring on projects are much more onerous and a little bit shocking for many,” Peter says. “But we develop in Canada as well and a lot of these underwriting requirements have been standard outside of the U.S., and those markets have fared much better because of it.”
On the construction side, debt is more of a critical issue with banks still largely unwilling to extend capital into the development space. Still, some players have found success—albeit with higher equity and underwriting requirements—working with regional banks that were not over-extended on real estate. “The lenders are out there but they are cautious,” says Pittro of RMK, which just broke ground on a downtown apartment complex and is looking to commence development on two other projects in 2010. “If you are a good company with a good relationship, you will find funding. And by relationship I mean a lender you have been working with for 20-plus years.”
CAPITAL AND COSTS
9. Trim Excess—and Yes, There is Some.
In late 2008, Connor challenged his firm from top down and bottom up to do three things: identify ancillary revenue opportunities; continue to improve the company’s twice-yearly Gallup survey customer service scores; and find $5 million in excess costs to cut from The Connor Group’s books.
The firm delivered, finding savings in operational costs, purchasing, and in the renegotiation of vendor contracts to ultimately best their challenge by $600,000. Even in organizations already stressed from squeezing blood from the stone, creative thinking can typically find additional cost savings. “Look at your hours, for instance,” advises RMK’s Pittro. “Do you really need to be open six hours on Sunday? Maybe you can do that in five. Those are the types of savings, too, where your team will be very appreciative of anything you can do as opposed to laying off people.”
Don’t forget about spending a little money to make some money. Campus Advantage used 2009 to purchase and install biometric time clocks at most of its locations for better payroll efficiency. “The clocks have enabled us to be much more accurate with labor hours and avoid unnecessary costs to the property,” says CEO Peter of the palm-scanning devices. “The clocks paid for themselves in a couple of months, and there’s only one trick to override it.”
10. Rework Tax Assessments.
Cost-conscious multifamily operators could also do well to continue wearing down assessors when it comes to property insurance and real estate taxes. Especially given the near national depreciation in both property values and NOI, 2010 will be a critical year for taking it to the Tax Man before a broader economic recovery initiates asset value rebounds.
“There’s no question that values are down across the country,” says Western National’s Shelton. “We are going back to assessors and asking for reductions in taxes and reductions in valuations. Obviously, the municipalities rely on those taxes to pay for their operating expenses, and they are quick to use sales comps and cap rates from before the market turned. It’s a challenging exercise, but you can have success in getting them to at least meet you half way.”
Indeed, renegotiation of property taxes and insurance costs factored largely into The Connor Group’s $5.6 million expense cut in 2009, and with continued diligence in that area, coupled with other creative expense reductions, Connor expects—and is asking for—another $1 million to $2 million in savings for 2010.
11. Empower Residents to Slash Energy Costs.
For multifamily property developers and operators historically focused on higher density and more energy-efficient, walkable communities, the green wave of the first decade of the 21st century was testament rather than revelation. Still, the jury is out on whether residents intrinsically look to their apartment communities during consideration of carbon footprints, particularly given the economy. “For most residents in this environment, price is a larger consideration than green,” sums up Simon’s Baron.
REIT UDR has been conducting ongoing research on resident environmental consciousness, and CEO Toomey says more needs to be done to reach out to residents and partner up on the green effort. “We’re constantly questioning what we can do to further reduce energy consumption, but more importantly, how do we educate our residents in that effort?” Toomey says.
UDR might want to consider the success of Campus Advantage, which embarked on a pilot resident education program in 2009. “After installing low-flow fixtures, shower aerators, compact fluorescent light bulbs, and programmable thermostats, we implemented a very simple contest among residents to see who could reduce their consumption the most,” Peter says. “The total cost to us was $9,300 on this property, and our utility savings this year was $40,000. Anybody who thinks green is touchy-feely is flat-out wrong. There are still simple things to be done to achieve tremendous savings.”
MANAGEMENT AND OPERATIONS
12. Be Prepared for the Worst.
Whether you anticipate recovery in multifamily real estate to be V-shaped or subscribe to a hockey stick performance model, experts agree that 2010 is going to look a lot like 2009, and that means continued threats to the bottom line. Simply battening down the hatches and riding out another four quarters might not even be enough: Some pundits recommend running your organization through disaster drills before crisis arrives.
“We are still in survival mode here,” says Patterson of ZOM Residential. “You need to plan for the worst, and the worst in this particular snapshot could be pretty bad. Spend some time walking through these doomsday scenarios, including bankruptcy. I recognize that sounds like a dreary prospect, but as a good company manager and steward, you need to be looking for a below-the-waterline hit, and make sure that if you take one, you can still somehow stay afloat.”
13. Improve the Organizational Chart.
Part of the 2010 business plan at Western National is to continue a position-by-position appraisal of company staff. “From the top to the bottom, we continue to evaluate both the contributions and commitment that people are giving every day,” Shelton says. “We will look to consolidate responsibilities and positions where that makes us a stronger company.” As the economy recovers, many multifamily operators say 2010 will be an apt time to recruit industry talent that fell victim to the recession. “When so many people have been laid off or mistreated by other employers, it is an opportunity to strengthen your organization,” says Bozzuto, who adds that The Bozzuto Group will continue to focus on deepening its marketing unit, particularly with younger, tech-savvy employees. “The focus, quite honestly, has been to hire young people who really understand how to market to young people and really understand social media in a way that most of us could never hope to.”
For multifamily units that kept the team intact, the industry job market picture is a double-edged sword, allowing for responsiveness to market changes but perhaps dictating a pass on available top talent. “We’re pretty solid with our team,” says Simon’s Baron. “We would rather keep people than staff up and staff down.”
14. Train to Retain.
Other firms are hoping to consolidate if job vacancies do arise. RMK didn’t resort to layoffs in 2009, and Pittro doesn’t expect to cut into jobs at the firm for the duration of 2010. Nevertheless, Pittro expects to consolidate roles should any particular job position become vacant. That in itself could offer additional retention benefits on the employee side as well as cost savings to the personnel line item on the budget.
“We will continue to implement job sharing across the company. It was successful throughout 2009 in terms of saving costs on payroll and the hiring process,” Pittro says. “Job sharing is not difficult in a company of our size with 20 sites, and the ability for employees to be cross-functional on the management and development side—or at least have exposure to our different business units—creates more efficient communication that enables us to move quickly when opportunities arise.”
Likewise, The Connor Group isn’t set to be a heavy recruiter in 2010, despite the expectation of a critical mass of qualified and even over-qualified applicants in the multifamily job pool. “Instead, we’re increasing our internal training budget this year by $400,000,” Connor says. “We continue to believe it’s who you’ve got, not how many people you’ve got.”
15. Figure Out Facebook.
The Bozzuto Group’s strategy of relying on a youth movement to assist in the Bozzuto social media marketing effort is evidence of the larger multifamily question mark still hanging over community networking sites such as Facebook, MySpace, and Twitter. While such sites represent vast pools of rental prospects, tapping into the reservoir, especially from a sales and marketing standpoint, remains a challenge.
“We’ve not seen a lot of traction out on Facebook or Twitter or the Wikis in terms of ‘Gosh I want to do business,’” UDR’s Toomey says. “It’s really an arena to socialize. The transactional aspect of it has not been developed.”
To that point, Camden has made an undisclosed investment in rentwiki.com, a social media Web site with an underlying lead generation Internet listing service in the system architecture. “We were impressed with their technology but also with the knowledge of the social media marketing,” CEO Campo says. “Everyone is trying to figure out what you do and how you do it and how you target the 18 to 25 demographic using Facebook and Twitter. We are spending a fair amount of time and money making sure we are state-of-the-art in that regard.”
16. Invest in Technology.
Elsewhere on the technology front, multifamily corporate leaders anticipate diverting dollars back into tech budgets after roughly two years of cuts. At UDR, Toomey anticipates keeping technology appropriations at full-throttle as his peer groups return to making infrastructure investments. “In a period when people have been pulling in their horns, we have been accelerating,” Toomey says. “Will that continue? Well, no one ever remembers second—you have to be first in this platform.” In particular, UDR looks to continue adapting its tech platform in anticipation of the eventual cob-webbing of desktop PCs in favor of mobile computing. “Our targeted renter, between 20 and 35, is adopting the mobile device as the primary communication tool,” Toomey says.
Likewise, Camden is looking at mobile applications for viewing apartment info and availability, completing leases, or even paying rent via cell phone, Campo says. “2010 will be characterized by more investment and focus in technology rather than less,” Campo says, adding that Camden will also look to bolster the tech footprint of the leasing office by introducing leasing kiosks at on-site locations.
That type of on-site, resident-facing technology will continue to be vital as multifamily operators compete for both tech-hungry Gen Y residents as well as older prospects who have come to expect lifestyle efficiencies and bell-and-whistle upgrades to the rental lifestyle. “Technology is the one spot that will not be part of a value engineering exercise in 2010,” says Lomenick of High Street Residential. “There is a lot of cost and effort in creating leading-edge communities, especially in development. Technology and your health club are the two most important things you can do, and if that means you can’t do solar panels on your roof, then the solar goes first.”
RENTS AND RENEWALS
17. Push Rents Wherever You Can.
File it under wishful thinking if you will, but 2010 could present some operators in certain submarkets the opportunity to begin to push rent levels incrementally higher, particularly towards the end of the year. “We’re not forecasting rent growth for 2010,” says ZOM’s Patterson, “but that doesn’t mean we’re not going to try.”
According to Nadji of Marcus & Milli-chap, the obvious contributing factor to rent improvement is a reversal in job creation. “Given the realities of the marketplace, rents are going to be under pressure through 2010, but I’m more optimistic than some that job creation could return stronger than expected on the upside of the recovery.”
Profiting from a swing in job creation will likely come at the submarket level, and Western National plans to keep the focus on its home turf as it relates to pushing rent levels to new prospects. “There’s no magic potion to increasing rents or putting more money in the bank—you’ve just got to be better, more creative, and more aggressive than the next guy,” Shelton says. “We’ll stay honed in on our submarkets and rely on our regional scale. We have an advantage there.”
18. Optimize Your Occupancies.
While minimizing vacancies is also a key strategy for many in an environment where prospect competition and costs for leads-to-leases are at all-time highs, some multifamily operators are both questioning the full-up strategy, and cautioning against it in as much as higher occupancies are becoming dilutive to effective rents.
“I’m always amused with these great stories about occupancies that are really stories about physical occupancy,” says Campus Advantage’s Peter. “That can often have little relationship to what your revenues are looking like, and occupancy at the expense of NOI is rarely a good thing.”
The Connor Group plans to take effective rents one step further in 2010, asking on-site personnel to deliver a 90 percent occupancy that maximizes effective rents rather than pushing for a full house. “Economic occupancy as compared to physical occupancy is always a far better gauge of asset health and value,” Connor says. “We could be 95 percent occupied but running at only 85 percent occupied relative to effective net market rents, and I think that’s the situation a lot of firms are finding themselves in. It’s far smarter to be only 92 percent physically occupied but to be at an 89 percent or 90 percent economic rent level.”
19. Burn Off Concessions.
A primary tactic in improving net effective rents, of course, is eliminating concessions at the door, a difficult step to take for site managers being pressed to convert leads and maintain property stabilization even as they are being asked to cut operation costs and simultaneously seek out new revenue. Nevertheless, concession burn-off will be part and parcel of any recovery in multifamily rent fundamentals. And as usual, firms operating ahead of the curve stand to benefit from earlier and more robust improvements to NOI.
“Concession burn-off is a major factor in 2010, and that burn-off factor has to occur before you see real rent growth,” Nadji says.
Like many firms, ZOM will continue to leverage yield management software as a way to reduce blanket market concessions and improve pricing sophistication at the asset level. “But what we are bleeding from are the enormous rent discounts and enormous commissions for apartment locators to bring people to our properties,” Patterson says. “The decline of those kinds of business practices is decisional, and it is something that we have to wean ourselves from. Our successes there will have more impact on NOI at multifamily properties than anything else over the next two to three years.”
20. Maximize Renewals.
Rather than even deal with pushing rents in a concession-laden environment, most firms are taking a nail-the-windows-shut approach to resident retention in 2010, refining strategies put into play across 2009 to keep heads in beds and effective rents high and healthy.
UDR has gone so far as to turn its renewal process into what Toomey calls a “resale process”—presenting renters a range of options at renewal time that include more space, greener options, perhaps better finishes, all geared towards an up-sell with a common denominator of keeping the resident in-house. “You have to look at this window of time and rethink the thought process around renewals.”
As a last resort, retention might even mean offering a market-rate rent reduction to the renewing resident, sans concessions.
Regardless of approach, retention in 2010 is likely paramount to any other on-site strategy for maximizing opportunity and success in a year of change. “We should be renewing a higher percentage of our rentals next year than we ever have before,” says ZOM’s Patterson. “If we don’t get that accomplished, then I think we have failed.”