It's often the little things that make an apartment complex stand out. From the floor plans to the landscaping, a builder who creates for his own account always puts extra effort into his communities. That certainly is true for Archstone Communities, an Englewood, Colo.-based owner and developer of luxury apartment complexes, headed by R. Scot Sellers, chairman and CEO. It's one of the few national companies that builds projects to own on a long-term basis.
Archstone's success is based on the company's development strategy and its unique ability to bring the resident's perspective to the forefront, says Dana Hamilton, senior vice president in charge of operations at Archstone.
It's the company's innovative yet practical design elements and its acquisition of prime real estate sites in high-barrier-to-entry markets, with a market cap of $6 billion, that caused Multifamily Executive to select Archstone as the 2001 Multifamily Executive Builder of the Year.
Development Strategy The basic framework for Archstone's development strategy is to build in high-barrier-to-entry markets, explains Matthew Gilman, senior portfolio manager at ABP Investments US Inc., an investor in Archstone. "Right now, they are building in areas where there is not a lot of development going on. And, over time, that creates a lot of value." These areas include Washington, D.C.; Boston and San Francisco.
For instance, in 1995 Archstone was one of the first developers to go back to the California market. However, the company didn't start construction on its first project there until Dec. 1996, says Sellers. "It takes a very long time, from finding the land to getting the zoning in place to getting it all ready to start construction. ... It can take anywhere from two to five years," he explains.
Archstone's California properties now consist of more than 15,200 units in the San Francisco Bay area, Ventura County, Los Angeles, the Inland Empire, Orange County and San Diego.
Since 1995, the company has become one of the state's most active builders. Because of the company's commitment in California, including setting up development teams and offices in Irvine and the San Francisco Bay Area, Archstone is usually able to "get a very early look at any development opportunity that exists and [often] the market doesn't even know it exists," says Sellers.
They have made all the right moves by going to California and selling out of weaker markets, says Gilman. Archstone has been an active seller of older communities that it didn't develop, such as El Paso, Texas; Tucson, Ariz., Jacksonville, Fla.; Columbia, S.C.; and Birmingham, Ala.; particularly complexes in secondary markets. The money from such sales has been moved through tax-deferred exchanges into Archstone's core markets.
"That's what is unique about our investment strategy," says J. Lindsay Freeman, managing director of the company's East Region. "We have demonstrated the ability over a period of years [to] move capital from market to market in order to maximize the growth potential from the assets in which we have money."
The Fundamentals "Our whole timing and strategy – to redeploy a large quantity of capital in the California market place – was perfect," says John Jordano III, senior vice president of investments for the Western region of Archstone. "Scot is a great strategist in the multifamily business."
Jordano attributes the redeployment success to Sellers' experience in the development business as a partner at Lincoln Property Co. "For someone whose background is on the investment side, he truly understands what it takes to keep the customer happy," says Hamilton.
As a build-to-own developer, Arch-stone is focused on establishing a local presence in its markets. That way, the people who oversee the company's development efforts in major markets not only live there, but have a long tenure both in those markets and with Archstone. "Having people who live and breathe in those markets is important," says Hamilton. It enables the company to know what the city wants, and what's on the area's political agenda, she says.
Once a project is approved, Archstone can take a look at how to spend its money to make the properties more attractive and to give them a longer life span, says Sellers.
For instance, three years ago the company began a sound proofing initiative. The goal was to find ways to make the apartments quieter. "Our research showed that [it] was an important issue to our customers," says Sellers. "We spend an extra $1,500 to $2,000 per unit now, in our development process, making sure that our units are quieter."
Other design elements the company has improved include landscaping and providing sufficient storage space. "Storage is something we are very focused on," says Hamilton. Every new unit Archstone builds has an entry closet, balcony/porch storage space, a washer and dryer area with storage space, storage in the bathroom and walk-in bedroom closets, explains Hamilton. "It's what people say is important. Potential residents are always worried about storage room," she says.
The company also tries to limit the number of floor plans at a community, because it makes it easier to market and build the complex. "By simplifying that, it allows us to put more resources into common amenities," says Hamilton. While Sellers recognizes that it's hard to offer amenities that are completely different from the competition, he contends that the company has taken a creative approach. Six years ago, Archstone designed business centers that were appealing and functional as opposed to being just a small room with a computer or two in it, he says. "We have gone out of our way to make [the business centers] feel like a comfortable library environment where people like to go and work, as opposed to just something you can say you have as an amenity."
All of Archstone's business and conference centers offer high-speed data access, faxes and copiers, says Hamilton.
"We've also gone out of our way to make our fitness centers ... like a commercial health club," says Sellers. The facilities are designed with high ceilings and have multiple televisions positioned throughout the center, so a resident has the ability to watch any station, says Hamilton. In addition, there are separate aerobic rooms.
When the resident profile warrants it, Archstone will include small movie theaters and community activity centers at the properties. The community centers offer parents a place to bring their children for art classes and other activities.
Computer alcoves are another design element that Archstone has found very popular with its residents. Archstone's policy is to give products and services a trial run before widespread inclusion. So, the work alcoves were tested in selected floor plans. It was important to monitor the computer usage so the company knew the best place for each alcove and its necessary wiring, explains Hamilton.
People did not want to move out of the first units with work stations, says Hamilton. "So, we redesigned all of the floor plans to incorporate a computer area," she says.
Risky Business Many real estate investment trusts (REIT) shy away from development because of the inherent risks of overbuilt markets or markets changing in the middle of construction. But for Archstone, good risk management is part of the company's success. "An enormous amount of value can be created through development," says Hamilton. "Our feeling is, if you do it well, you can create value that you can't otherwise create. ... People think [development is] risky, but there are things you can do to make it less risky."
To start with, Archstone always places land under contract with the understanding that the deal will go forward only if Archstone is able to get the necessary zoning and support from the community. "The price has to work for us," says Sellers, "but, we're also concerned with having sufficient time for the approval."
"You never know what the political jurisdictions are going to say until you have that conversation," Sellers explains. "Sometimes they'll say, ?Yes, if you'll do the following,' and then we can work out what that means, or what it costs. Other times they'll say, ?No way, we'll fight you until the end,' and very rarely is it worth doing at that point."
The fact that Archstone only develops in high-barrier-to-entry markets also protects the company from risk. Because it's so hard to build in these markets, they are much less exposed to the impact of a recession.
In fact, since Archstone builds in communities that also contain expensive single-family homes, the likelihood of people staying in the apartments during a recession is greater. For example, from 1991 to 1993, the Los Angeles County market was devastated by aerospace industry layoffs. The area lost 440,000 jobs in two years, but overall apartment occupancies were down only 1 percent – even though unemployment was 11 percent, says Sellers.
Archstone doesn't have more than one or two communities under construction at one time in most of its markets. There also is minimal competition in those markets.
When Archstone walks away from a deal, it's almost always in the early stages. The company would walk away from a transaction if things changed so dramatically that the numbers no longer made sense, says Sellers. "We just had a transaction in Southern California that we placed under contract in cooperation with the seller," he explains. "When we went to meet with the city to discuss our interest in rezoning the site, we were told in no uncertain terms that there would be no support forthcoming from the elected officials that were responsible for that area. So, we went back to the seller and said it doesn't make sense to [continue]."
Acquisitions Part of Archstone's success also is based on its acquisition strategy. In each of the past four to five years, the company purchased more than $300 million worth of existing apartments. "When we make an acquisition, we are generally looking for similar characteristics – a well designed building in a practical location," says Sellers. The company doesn't have quite as much latitude on physical products it acquires because it didn't build them. However, they are always looking for a great location that is under-managed. "We found that virtually everything we bought, we've been able to dramatically increase the cash flow the building's producing just by applying our management acumen and expertise to that new acquisition."
Archstone is not focused on amenities at properties it acquires. The company is more concerned with functional floor plans – because that's something you can't change, says Sellers. "If you focus on functional floor plans that meet the demands of the resident base in the area with a convenient location, everything else will really take care of itself."
For the future, Archstone has more than 8,900 units in the pipeline. The company completed approximately 5,500 units in 2000 and expects to complete another 4,000 this year.
inglewood_tcm23-94339.jpg?width=187&404=404.png" alt="Archstone Inglewood Hill, in Sammamish, Wash., offers a mix of one-, two- and three-bedroom units. Amenities include balcony and in-unit washers and dryers."> Archstone Inglewood Hill, in Sammamish, Wash., offers a mix of one-, two- and three-bedroom units. Amenities include balcony and in-unit washers and dryers.
Archstone Inglewood Hill, in Sammamish, Wash., offers a mix of one-, two- and three-bedroom units. Amenities include balcony and in-unit washers and dryers. In the next five years, the company hopes that the investment community will view it differently, says Sellers. "We want to be perceived as an operating business," he says, "and one that has every bit as much validity, intellect and future potential as any other core operating business in the S&P 500."
The Key to Resident Services Part of being a successful developer is merging operation and development plans. A company not only needs to offer a great product, but it needs to offer the services its renters desire. Archstone Communities has done that on several levels.
It still amazes R. Scot Sellers, chairman and CEO, that three years ago, apartment companies didn't have a way to do instant credit checks for potential residents; instead, it took at least two days. "Apartments were the only business I can think of that would let our customer walk out the door when they wanted to consummate a sale," he says.
But as an industry, the multifamily business didn't have the tools to process credit approvals more quickly. Archstone set out to change that by working with SafeRent to design a credit scoring mechanism which uses the latest technology – also used by mortgage, credit card and automobile finance companies – to approve customers' credit to rent an apartment.
"It's been tremendously [important]," says Sellers. "Now, in 30 seconds you know whether you're approved or not. And for our best customers, we tell them we don't even require a security deposit from them; because their credit is strong, the scoring mechanism will produce a recommendation that says this individual's credit is so good, you don't need to require a security deposit."
In addition, Archstone offers a program in which all residents are able to get their security deposit back on the day they move out.
"Our customers told us 'the one thing we hate about apartments is you always have to wait so long to get your deposit back,'" says Sellers. So, the manger will walk the apartment with the resident to check for any damages and then write the check that day.
"It's so much better to do it that way, because when you see it together ? there is no dispute on whether there was a stain in the carpet," he says.
To further serve residents, Archstone has signed an agreement with BroadbandNOW to provide high-speed Internet access to as many units as possible. The goal of the company was to find a provider that did a good job and that had the capability to provide the service through multiple infrastructure options – cable, cable modems, DSL or wireless.
By recognizing that Internet access is important to its residents, Archstone also realized that online leasing options are important. The company has been developing an online leasing model for the last 18 months.
Now, they offer rental information online, but no apartment company has inventory available online yet. The goal is to enable the customer to see available units and price and to be able to be able to make a deposit, agree to a lease form and reserve that apartment – all online.
But, what Archstone believes will be a key component to its growth will be the implementation of its revenue management software. The company started working on the program more than two years ago.
"We believed that it was possible that some of the innovative concepts that were being utilized in the hospitality, rental car and airline industries might apply to our business," says Sellers.
By teaming up with Talus Solutions Inc., Archstone has developed such software, and they are now testing and debugging it.