After a tough 2004, multifamily REITs landed at the top of their game last year. Just ask Ric Campo, CEO and chairman of the board of Camden Property Trust. "2005 was an awesome year for our company and for REITs," he says. "2005 was clearly the year that REITs turned the corner from an operational standpoint." And Campo has the numbers to prove it: The company experienced a 3.5 percent same-property NOI growth in 2005–its first positive NOI growth in three years.
Camden isn't alone in its high marks. Many apartment REITs recorded their best performances in several years, thanks to strong apartment market fundamentals such as sustained job growth, limited new apartment supply, and declining home affordability. "2005 was really a transitional year for the multifamily REITs," says David Rodgers, research analyst for Cleveland-based KeyBanc Capital Markets. "For a lot of the companies we cover, we saw a 5 [percent] to 7 percent same-store revenue growth by the fourth quarter, really indicating that we hit that inflection point and are on a good trend for 2006."
One company posting such high results: Equity Residential. One of the largest REITs in the country, Equity saw its same-store revenue increase 3.9 percent from 2004, while its NOI increased 2.8 percent. The booming condo market proved to be a big factor in the company's high performance. While many REITs sold a large amount of property to condo converters, Equity and a handful of other firms also condo-converted some of their own properties. "We just had a sensational year in our condo-conversion business," says David Neithercut, president and CEO of Equity Residential, which converted and sold 2,241 condo units for a pre-tax profit of $100 million.
The strong condo market also helped REITs by limiting apartment supply and boosting NOI performance. Camden, for example, saw NOI jumps in markets with booming condo activity, including an 11.5 percent increase in Las Vegas and a 14.3 percent increase in Tampa, Fla. "The demand had to go somewhere else, and it went into existing rentals, which drove occupancy rents up and rental rates up," says Campo.
Condo activity wasn't the only hot topic in 2005. A handful of REITs disappeared from the scene due to mergers and deals taking companies private. A positive move for the valuation of public firms, this flood of capital kept investors focused on REITs despite rising interest rates, which typically cause investors to shy away from REITs, says Stephen Swett, an analyst and managing director with New York-based Wachovia Securities. "At the start of the year [2005], we thought a rising interest rate environment would hurt REITs overall and would make it tough for REITs to post a better total return than the rest of the market for a fifth, sixth year in a row," says Swett. "What was surprising to us was the capital out there for real estate remained so aggressive, which kept the valuations so high despite the rising rate environment."
Now focused on 2006, REITs expect to post equally high results at the end of this year. "The investment fundamentals still look good," says Campo. "We are going to finish building the pipeline out, and the same-store NOI growth and revenue growth looks like it is going to be higher in '06 than it was in '05."
–Rachel Z. Azoff
Watergate Revisited
A famous hotel goes condo.
Mention the Watergate Hotel and most people immediately think of former President Richard Nixon. But one Washington, D.C., developer hopes people will soon envision high-end condos instead. Monument Realty is transforming the 251-room hotel into The Watergate, a 96-unit luxury condominium community expected to open in late 2007 with top-of-the-line finishes and amenities.
The Watergate Hotel, part of a complex of six total residential and office buildings, will close its doors in late spring, with construction expected to begin this summer. Units will be priced from the $700,000s to more than $9 million. The building's drab, dated interior will be completely gutted to make way for one-, two-, and three-bedroom and penthouse units each offering floor-to-ceiling views of the Potomac River and a sparkling spread to include Poggenpohl cabinetry, Dornbarcht bathroom fixtures, and SubZero, Bosch, and Viking appliances, plus stone surfaces collected from around the world.
The hotel's unique architectural design (every façade is curved) dictates the placement of interior walls and living areas. "We tried to observe the geometry that architect [Luigi] Moretti has established initially when he designed the building," says Stephen Perkins, principal of ForrestPerkins, a Washington, D.C.-based luxury design and architecture firm that is designing the building's interior space. "You contain interior things like kitchens and baths at the core of the unit, and then you reach out with walls that then dissolve to glass as they touch the perimeter of the building."
These lavish interiors will be matched by equally luxurious community amenities, including a spa with a full-service health club, a brand-new restaurant, valet parking, and a lounge and rooftop terrace with river views.
And with such attractions, Monica Lewinsky might be tempted to visit her old stomping ground.
–Rachel Z. Azoff
Call for Entries
Think your CEO is the best in the industry? Have a fabulous apartment property you can't wait to show off? Enter the 2006 Multifamily Executive awards contest. For the first time, the entry process will take place online at www.mfeawards.com. Entry forms with fees are due May 16, with binders due June 30. Winners will receive recognition at the Multifamily Executive Conference in October. Winning entries will be featured in upcoming issues of the magazine.
Questions? Contact Rachel Z. Azoff at 202-736-3494 or razoff@hanleywood.com.
Disappearing Act
Several years of frantic condo conversions have dramatically reduced South Florida's apartment stock. In 2002, there were 174,995 apartment units in Palm Beach, Broward, and Dade counties, according to McCabe Research and Consulting. Now, only 104,714 rental units remain in those markets. "It's taken more than 220 of these complexes out of the inventory," says Jack McCabe, president of the company. "It's a huge problem."
–Les Shaver
New 'Hoo
Home Properties CEO Ed Pettinella may be making some trips to Charlottesville, Va., next fall. Pettinella's son, Ryan, recently committed to play for the University of Virginia Cavaliers (often referred to as the Wahoos). The younger Pettinella, a 6'9" post player, previously played at The University of Pennsylvania for two seasons before transferring to UVa.
–Les Shaver
ISO the Under-40 Crowd
Know of an upcoming multifamily entrepreneur under 40? Or what about a young shining star at big private company or REIT? If so, drop us a note with the name and contact information of this standout performer at lshaver@hanleywood.com.
–Les Shaver
Got Mold?
A new mold risk reduction program helps protect lenders and developers against the financial fallout associated with the pesky fungi. The program, introduced by the nonprofit Greenguard Environmental Institute, certifies that builders use industries' best practices during the design, construction, and ongoing operations of newly built multifamily and commercial properties to safeguard against the damage and resulting losses caused by mold. For more information, visit www.greenguard.org.
–Rachel Z. Azoff
Money Talks
Want to find out what your counterparts earn? You might just be in luck. Currently, the Securities and Exchange Commission allows the public to see salary packages for the CEO, CFO, and the next three highest-paid executives in management at public companies. But a new SEC proposal calls for the salary disclosure of up to three additional high-paid employees.
–Rachel Z. Azoff
Conversion Conflict
San Francisco landlords turn to Ellis Act to evict renters.
California's Ellis Act, which allows landlords wanting to get out of the rental business to evict residents from their units, is riling up renters in the excruciatingly tight San Francisco apartment market. Many landlords are invoking the act to convert rental units into condos or tenants-in-common, or TIC, properties.
"Evictions for condo conversion result in turning scarce affordable rental units into unaffordable condominiums, depleting the rental stock which San Franciscans rely on," explains Ted Gullickson, leader of the San Francisco Tenants Union.
But landlords say they should be able to convert their properties to more lucrative uses. With little turnover, many residents pay rents below fair market value, according to Todd Wenzel, an attorney with Ropers, Majeski, Kohn & Bentley who represents many of the city's landlords.
"This can cause property owners to lose money, because the low rents they can legally collect do not cover the increased property taxes and operating expenses," he says. "The Ellis Act may be the only mechanism to allow someone to keep a property they spent years saving to buy or that has been in their family for generations."
Wenzel expects the conversions will continue for a while, then taper off. "When the city becomes saturated with too many condos and TICs, it may reduce the sale prices so low that it may not make sense to convert certain properties," he says. "The market will get to a point where there will be a good balance of rental units, TICs, condos, and single-family homes, promoting a healthy, diverse cross-section of residents within the city."
–Margot Carmichael Lester
Major Milestone
CB Richard Ellis turns 100.
One of the biggest brokers in multifamily just turned a century old. Founded immediately after the 1906 San Francisco earthquake, CB Richard Ellis Group has evolved from regional player to a global real estate services provider.
Its stature in the multifamily business has also stayed strong as well. For the past six years, Real Capital Analytics named CB Richard Ellis the top multifamily broker representing the seller in terms of sales volume. "CB Richard Ellis basically has the broadest brokerage arm," says Bob White, president of the New York-based real estate information provider. "They have more feet in more markets. CB has been real aggressive in hiring top talent in the apartment arena and across all property types. They want to have the leaders in each market."
Many of these feet have traveled a lot of ground in their respective markets. "We create the context for enabling [the broker's] success and creating the environment within which an individual can succeed," says Greg Vorwaller, president of investment properties for CB Richard Ellis. "They know they have a safety net of peers and [an] infrastructure that will allow them to deliver to the client."
They also have a loyal group of big clients, according to White. "Some of those deals were huge portfolio deals," White says. "They're really well known and have great relationships with all of the institutional buyers and REITs. They also have a lot of brokers that know a lot of the local buyers."
White sees one other advantage as well. "They have LJ Melody," he says, referring to the company's real estate banking arm. "Being able to offer financing has been a real competitive edge for them."
–Les Shaver
Executive Feedback
How are you accommodating parking needs in your projects?
A: "We provide parking for all units; however, we price parking separately. This allows people to customize their purchase to fit their lifestyle. Why pay for two spaces if you only need one? Or you can buy three. Urban buyers value choices like these." –Greg Vilkin, president, Forest City Residential West and Forest City Stapleton
A: "In new condo construction, we strive for a minimum of 1.5 parking spaces per unit. We allow for the larger, more expensive units to have up to two parking spaces if desired. In adaptive re-use and condo conversions, we may dedicate the lower level of the building into parking if the column grids and access will allow for it. ... A final strategy is to secure rental parking in buildings near by. We pre-pay it for two years on behalf of each condo buyer." –Jim Abdo, president and CEO, Abdo Development
A: "Parking is the driving force that determines density and product type today. ... [S]tructured parking can solve a major constraint. We've successfully included below-grade and on-grade structures in Trio in Pasadena and City Lights in Orange County [respectively]. Trio involved the adaptive reuse of L.A.'s first parking structure, built in 1929." –Don Gause, senior vice president, Shea Properties
Project of the Month
Clara Vista Townhomes, Portland, Ore.
an unusual mix of green building elements and environmentally sound practices. But Clara Vista isn't a high-end development; the sustainable community is targeted at the affordable rental set. Bucking the notion that green building is only found in luxury developments, the 44-unit multifamily rental residence is on track to become a LEED-certified affordable housing project.
"We wanted to provide safe, high-quality housing for those with lower incomes," Carleton says. Mission accomplished: The nearly $8 million project has green-friendly features like whole-house ventilation systems, onsite rainwater filtration, efficient hydronic space heating, abundant natural lighting, fluorescent lighting fixtures, fiber-cement siding, insulation, and Energy Star appliances. Each unit also features solar hot water heating, which was made possible through numerous local and national grants.
"We wanted to push the envelope even further," says Brian Carleton, principal of Carleton Hart Architecture, which designed Clara Vista. Seabold Construction built the project. The biggest challenge was to combine green building, energy-efficient practices with an affordable audience in mind, Carleton says. Making those elements fit on a tight budget was tough, he adds.
Hardscape is minimized through structured parking under a primary building and by sharing parking drives with a neighboring development. Clara Vista's style reflects the local vernacular with gabled roofs and lap siding. The homes are painted in rich colors such as warm gold and brown earth tones and deep blue-grey finishes.
Clara Vista, which serves residents earning 40 percent to 60 percent of the area median income, is built on two sites around open green spaces. Density is 29 units per acre. Three- and four-bedroom floor plans range in size from 1,170 to 1,408 square feet, and monthly rents range from $578 to $1,025. The complex opened in February 2006.
–Abby Garcia Telleria