Bryce Blair has a plan to house nearly your entire family. For your kids who've just left college and gotten their first jobs, the chairman of the board, CEO, and president of AvalonBay Communities offers economical AvalonBay studios and two-bedrooms in some of the hottest markets in the country. For your adult children, who may be married with good jobs, he has bigger apartments and townhouses in places where buying a single-family home is very expensive. Finally, for your retired, fun-loving parents who want to be free from home maintenance at last, he has spacious rental units near golf courses and other amenities.
Blair, MULTIFAMILY EXECUTIVE's 2004 Builder of the Year, wants AvalonBay, which brands all of its properties with the Avalon name, to eventually be like auto manufacturers, providing different levels of luxury. “BMW has the 3 Series, 5 Series, and 7 Series, and you move up the food chain as your life changes,” he says. “We hope to be able to capture people when they're 23 in a studio apartment with basic finishes, 28 years old when they're married and move up to a two-bedroom, and we hope to capture them as empty nesters.”
AvalonBay meets the needs of these renters with a simple plan: It focuses on 16 economically diverse and predominantly coastal cities around the country. Inside those markets, it builds a wide variety of products that not only fit the tastes of a changing demographic but also dovetail with the expectations and architecture of each community. The company does this through a decentralized approach, where local developers, who know the pulse of their markets, make many of the key buying and development decisions.
This approach has paid off handsomely during the past few years. In 2002, AvalonBay's stock price was $38. Late this fall, it stood at roughly $70. The company generated $105.7 million in net income last year (as of September's end) and boasts a $3.1 billion development pipeline. “These guys stack up very well,” says Craig Leupold, an analyst with Green Street Advisors in Newport Beach, Calif. Though AvalonBay assets achieve yields comparable to the company's competitors, “they are in high barrier-to-entry places so they tend to garner higher cap rates,” Leupold says.
From the Ground Floor Up
With his Harvard MBA and CEO suits, Blair mixes well with Wall Streeters and other finance types. But he started on a very different side of the business, earning his undergraduate degree in civil engineering from the University of New Hampshire. He put both those credentials to use at Trammell Crow's Boston office, where he began working in 1985. “I really liked the physical act of creating things,” Blair says. “The idea of creating physical space where people could live definitely motivated me.”
Once at Trammell Crow, Blair got his orientation to the multifamily business from David Dressler, who hired him, and industry icons Richard Michaux and Ron Terwilliger. “It was a great ground-floor opportunity,” Blair says. “It was an entrepreneurial opportunity. Trammell Crow fit all of my goals.”
And Blair took advantage of the experience, building condos and apartments in the 1980s. As the public markets became attractive for multi-family companies, Trammell Crow spun off its Northeastern and Mid-Atlantic divisions in 1993, creating Avalon Properties, where Blair became senior development director. When Avalon merged with West Coast counterpart Bay Properties in 1998, Blair took over as head of development and construction for the newly formed AvalonBay Communities.
As Blair moved up, Michaux was giving the young executive increasing responsibilities, including more exposure to the investment community and the company's board. “Dick was grooming me before I knew I was being groomed,” says Blair, who became president in 2000. “By the time I was named president, the wheels had already been in motion. It was a seamless transition for the company and the investment community.”
Recession Response But no training program could have prepared the new CEO for 2001. The recession was beginning to hit, resulting in huge job losses in AvalonBay's markets. Then came 9/11 and the low-interest-rate craze that boosted home-buying while depressing renting. “Early on, I was a little shell-shocked by the weakness of the economy, the loss of jobs, and the weakness in our markets,” Blair admits.
But Blair soon realized that he and his senior leadership couldn't dwell on factors—such as job losses in their markets—that they couldn't control. “They've learned that no matter how hard you try, you can't buck what's going on the broader markets,” analyst Leupold agrees.
Instead, AvalonBay looked for ways to create value in challenging economic times. It repurchased stock when its stock price fell to $28, selling it six months later at $36 per share. It trimmed overhead costs. This financial strategy worked: AvalonBay was one of four multifamily companies that paid its dividend through the recession.
The company also slowed its development pipeline considerably. With a shaky economy, AvalonBay decided to be conservative and build its balance sheet, not a portfolio of vacant apartments. “They basically got to the point where they ensured that they had adequate funding for any projects that they would start in their development pipeline, as opposed to doing something on a speculative basis in terms of raising additional capital,” Leupold says. “They maintained a strong balance sheet with good flexibility.”
AvalonBay also sold assets to keep its balance sheet strong. In 2003, it disposed of $450 million in assets, more than twice what it had projected. With low cap rates in many of AvalonBay's markets, Blair received numerous offers, specifically from condo converters, that he couldn't refuse. “We used to be emotional [about keeping properties],” he says. “We're not emotional anymore.”
Blair recycled this equity back into AvalonBay's development pipeline, now up to $3.1 billion in assets under construction, entitled land, and land options. This gives AvalonBay great leverage as the economy improves. “That's a tremendous component of the company's valuation,” Blair says. “It's a tremendous driver of future earnings. We can regulate how much we do and whether were more aggressive or more conservative, depending on how we feel about the economy.”
Coastal Presence While AvalonBay can change direction on things like acquisitions and dispositions, it does have a long-term business strategy from which Blair will not deviate. The approach, which started under Michaux but was tweaked by Blair, revolves around the idea of wide product diversity in a select number of markets. “We want to have a greater presence in fewer markets and we want to have a broader portfolio,” Blair says. “Those are two things that drive every decision we make.”
Currently, AvalonBay operates in 16 markets, which offers a portfolio with geographic reach and economic diversity. Washington, for instance, relies on the federal government. New York has its financial base, while Chicago—AvalonBay's only non-coastal market—focuses on manufacturing. Boston and Northern California are driven by the technology industry. “They're very good at looking at markets,” says Peter Linneman, principal of Linneman Associates, a real estate advisory and consulting firm in Philadelphia. “And they're very good at figuring out how to succeeded in those markets.”
Once in these markets, Blair uses demographics to dictate building decisions. “He can see some of the changing nature of the apartment industry—some of the demographic changes that are occurring and the marketplaces where people are moving, where jobs are being created, the kinds of growth areas and demographic segments that make some sense,” says Lance Primis, the lead independent director on AvalonBay's board.
Diverse Decisions Just as demographics have changed, so has AvalonBay's property mix. Prior to the mid-1990s, AvalonBay developed primarily three- to four-story wood-frame apartment buildings. But as opportunities arose in Boston and Washington, the company began building mid- and high-rise urban infill.
Those decisions led the Alexandria, Va.-based REIT to where it is today: an apartment company with diverse properties and price points. AvalonBay builds garden-style apartments for people who live and work in the suburbs, high-rises for those who prefer urban areas, and townhouses for families or empty-nesters who desire more space. “We are developing a broader range of products,” says AvalonBay COO Tim Naughton. “Bryce is encouraging our developers to branch out.”
With in each product type, AvalonBay offers even more diversity. For instance, a high-rise may have two top penthouse floors with Corian countertops, crown molding, and higher ceilings. Residents who live below those penthouse floors won't get the same frills, but they may pay $100 to $200 less in monthly rent.
This represents a departure from the company's past practices, when finishes and packages where pretty much the same in every AvalonBay apartment. But after careful examination, Blair realized that in many cases, AvalonBay was overbuilding for what its customer wanted. “They thoughtfully evaluated their strategy,” says Terwilliger of Trammell Crow. “A lot of people don't reexamine the focus of what they're building.”
This even extended to amenities, where Blair decided to pull back on the luxurious clubhouses and business centers AvalonBay had become accustomed to including. “Business centers had become a standard feature,” COO Naughton says. “Bryce challenged the company as to whether it should be a standard feature.”
Building the Pipeline While Blair may lead AvalonBay in these decisions, he likes to say he's just one member of the team. Many of the company's senior development officials work in the field, where Blair gives them tremendous freedom about what to build as long as they hit certain targets. “We may want 500 units in Southern California,” the CEO says. “It's up to them if they build one 500-unit building or two 250-unit buildings. It's up to them if they do it in a joint venture with the land seller, if they do it with leased land, [or] if it takes [them] five years to get approvals or they buy it retail.”
Such employees aren't completely on their own—they must get approval from AvalonBay's head of development and the company's investment committee, which consists of Blair and other senior officers. If the committee approves it, the development official goes forward with the property. Later, the committee reviews the project again, reviewing any changes in pricing or yield before giving the final OK to begin construction. “The management investment committee serves an important control function, particularly in a public company,” Blair says.
At the same time, Blair appreciates the flexibility of the development process AvalonBay has embraced. “We have a very decentralized organization,” says Blair, who believes the approach improves employee retention rates. (The company's senior officers average about 16 years with the company.) “We think that's critically important in attracting and maintaining the quality of people that we have. People are happy with the balance between the freedom they have and the support they get.”
And it leads to success. By having developers on the ground in each community, AvalonBay can build properties that fit. “While other developers might envision cookie cutter, one- and two-bedroom garden apartments for a site, our local team's insight might guide us to develop a mid-rise community with studios, lofts, and one-, two-, and three-bedrooms, knowing this product type would broaden its appeal to recent graduates and empty nesters in the area,” says Sam Fuller, executive vice president of development and construction for the company. “These local insights also guide the services and amenities we provide, ensuring the level and finishes meet the price-point in the market.”
Having these experienced developers familiar with local markets also provides many other advantages. It means AvalonBay has more than 15,000 apartment units in the pipeline and yields higher than industry averages. They know the markets, the development officials, and the good land. “The organization is the Builder of the Year,” Blair says. “It's the people in the field that identify the opportunity and execute on it. That's the reason we have one of the finest apartment portfolios in the business.”
Ask Bryce Blair what he's concentrated on since taking over AvalonBay and the first two things you'll hear are focusing on a limited number of markets and building a variety of products in those markets. But soon afterward, he'll list a third, but equally important, goal: great customer service.
The concern for the customer was readily apparent in his biggest personnel shakeup since accepting his new CEO role. Early in his tenure, Blair reviewed the AvalonBay organizational structure and realized there were some extra layers of management personnel. He cut those layers, using the savings to hire more experienced property managers. “As opposed to having less experienced community managers and having layers of the organization telling him or her what to do, we have more experienced managers and less layers telling them what to do,” Blair says.
While he admits the decision was painful, customer surveys (another initiative Blair began at AvalonBay) have shown it was the right decision. “This is our fourth year of customer service surveys,” he says. “Each and every year we've improved.”
The company improves by celebrating those managers who do well and spreading their best practices across the portfolio. Struggling performers get some “TLC” and, if things still don't improve, they're replaced. While this system has spawned dramatic improvement, Blair wants his property managers to reach even higher. “We're good, but not great,” he says. “We're on our way to becoming great.”
Avalonbay Communities at a Glance
- What: A REIT that develops, redevelops, owns, manages, acquires and sells multifamily real estate
- Founded: 1993
- Headquarters: Alexandria, Va.
- Revenue: $609.6 million (2003)
- Starts Projected in 2004: 2,135
- Units in the Pipeline: 15,167
- Development Pipeline: $3.1 billion
- Geographic Coverage: Both coasts, including New York, Washington, Southern California, and Chicago
- Revenue Sources: Rental income, development fees, management fees, and gains on sales of assets/land
- Employees: 1,600
Operational Revamp Ask Bryce Blair what he's concentrated on since taking over AvalonBay and the first two things you'll hear are focusing on a limited number of markets and building a variety of products in those markets. But soon afterward, he'll list a third, but equally important, goal: great customer service. The concern for the customer was readily apparent in his biggest personnel shakeup since accepting his new CEO role. Early in his tenure, Blair reviewed the AvalonBay organizational structure and realized there were some extra layers of management personnel. He cut those layers, using the savings to hire more experienced property managers. "As opposed to having less experienced community managers and having layers of the organization telling him or her what to do, we have more experienced managers and less layers telling them what to do," Blair says.
While he admits the decision was painful, customer surveys (another initiative Blair began at AvalonBay) have shown it was the right decision. "This is our fourth year of customer service surveys," he says. "Each and every year we've improved."
The company improves by celebrating those managers who do well and spreading their best practices across the portfolio. Struggling performers get some "TLC" and, if things still don't improve, they're replaced. While this system has spawned dramatic improvement, Blair wants his property managers to reach even higher. "We're good, but not great," he says. "We're on our way to becoming great."