Trammell Crow Residential's property insurance this year cost about 60 percent more than last year–and that's one of the success stories. Companies with portfolios that include properties in places such as Florida and the Gulf Coast (hurricane risk), California (earthquake risk), and central business districts (terrorism threats) are getting hammered with increases of from 50 percent to 400 percent for certain layers of property insurance.
"For properties in areas with hurricane and earthquake risk, the market is the most difficult it has ever been," says Kevin J. Madden, managing director for the real estate practice group of Aon, a Chicago-based insurance broker. "One of the biggest [insurance] renewal dates is this June, and I'm looking forward to probably one of the most miserable months of my career."
While multifamily firms certainly expected 2005's devastating hurricane season to boost the cost of '06 insurance renewals, the increases have far exceeded the worst expectations. (Interestingly, properties with no catastrophic exposure are reporting flat pricing or increases up to 15 percent.) In addition, fewer insurers are willing to offer multifamily coverage, and they're doling out smaller amounts.
"In past hard markets, there have been pricing problems, but this is the first time in about 25 years that there have actually been capacity problems combined with pricing," says Joseph
A. Milan, vice president and risk manager at AIMCO, a Denver-based REIT. "Carriers are simply saying, 'We're not going to write your business because we don't have enough reinsurance or protection for ourselves.'" In addition to the high number and value of insured losses last year, credit rating agencies, such as Standard and Poor's, also are to blame for capacity reduction, say insurance brokers. The agencies are threatening to downgrade ratings of insurance companies that are seen as offering too much money for catastrophic coverage.
As a result, multifamily firms are being forced to find more carriers to cover their risks. "If it took two to five insurance companies to write your risk [in the past], it could take as many as 10 to 15 companies to complete your risk," says Madden. To fulfill the critical probable maximum losses level of insurance, Trammell Crow had to buy insurance from 17 providers this year; last year, it needed only eight. Like many others, the real estate firm had to reach out to the global markets. "After going to all of the domestic markets, begging and pleading, finally the linchpin turned out to be a Lloyds' syndicate [in London]," says Scott Woodward, Trammell Crow's risk management director.
Fortunately, Trammell Crow already had a strong rapport with the London markets. Such relationships are the key to piecing together a successful insurance package, experts say. AIMCO, like many companies, makes it a point to personally meet with underwriters to pitch their accounts. "It's analogous to applying for a job," Milan says. "There's a stack of applications, and if they're not personalized, you are not going to get noticed."
Advance planning also is essential. AIMCO typically plans 90 to 100 days ahead of its renewal date, but for its March '06 renewal, the company started planning right after Hurricane Katrina hit last summer, Milan says. And more planning is under way as hurricane season officially starts this month. AIMCO is reviewing its disaster preparedness plan, which includes everything from deploying satellite phones to having a construction services team ready to handle any property damage.
"We are partners with our insurance companies, and we don't take the view of a hurricane as an act of nature that we can't control," says Milan. "We do absolutely everything we can on the pre-loss preparation side." And you can bet insurance companies will take notice.
–Rachel Z. Azoff
Q1 2006 Insurance Increases
- 45% for a portfolio with heavy California earthquake exposure
- 150% for a portfolio with heavy Florida hurricane exposure
- 90% for a large portfolio with some California earthquake and Florida hurricane exposure
Source: Aon
Leasing Lessons
Convince on-site staff to raise rents.
As the apartment market recovers, some firms have been able to push rents up by as much as $50 per month in some locations. But that's often easier said than done, even among success stories, since many young leasing agents haven't worked in a positive operating climate and aren't used to such pricing power. "The renters have been in the driver's seat for so long, and [leasing] managers have just been trained to take everything that comes in the door and do what they have to do," says Laurie Lyons, CEO of Dallas-based BH Management.
But that mindset is quickly changing. Companies are retraining on-site staff on ways to push both rents and renewal rates. The best way to train staff: Make the issue top of mind. "Managers are on site every week, and everyone is talking about raising rents, raising rents, raising rents," says David Neithercut, president and CEO of Chicago-based Equity Residential.
In addition to getting training, leasing agents need to be confident that the unit they are selling is worth paying more for, adds Lyons. BH Management's biggest focus this year is the upgrade of all units to include such small details as nickel-finish cabinet doorknobs and fresh light-switch plates. "We feel we are giving the managers something to work with," says Lyons. "If we can train them and convince them they truly have this beautiful new apartment to sell, they will be able to sell it."
Companies also are boosting leasing agents' confidence by using revenue management systems that automatically compute rental prices. The system gives leasing agents power because they know the price is right, says Ric Campo, CEO and chairman of the board of Houston-based Camden Property Trust. "They are able to sell the value of the property instead of, 'Let me tell you what our discount is today.'"
–Rachel Z. Azoff
New Venture
CEL & Associates in Los Angeles has gotten together with the Bradford Group in Los Angeles to form CEL Compensation Advisors. The two firms will produce the CEL National Real Estate Compensation & Benefits Survey. The new venture, intended to be a resource for both public and private firms, will include surveys from the two firms, which are well-versed in gauging compensation.
–Les Shaver
Zoom In
Sperry Van Ness, a brokerage firm based in Irvine, Calif., released a new mapping and imagery system that uses Microsoft's Virtual Earth mapping platform. The software provides the ability to view a property and surrounding area from different distances, directions, and points of reference.
–Les Shaver
Go, Crimson!
Harvard University graduate students won the Urban Land Institute's annual Gerald D. Hines urban design competition. The task: Redevelop a 100-acre former industrial site to connect two portions of St. Louis University's campus, adding at least 1,000 units of affordable, workforce, and market-rate housing. The winning project: the creation of a north-south "academic spine" along the campus' Grand Boulevard bridge. An urban northern edge and biotech-oriented southern edge would unite the campus around a mixed-use node of academics, biotechnology, transit, recreation, commercial, and residential activities.
–Rachel Z. Azoff
Senior Influence
A new charter school in Chula Vista, Calif., is taking an unusual step to link seniors with kids: The Chula Vista Learning Community Charter School is allowing a developer to build 42 apartments on its grounds, according to the San Diego Union-Tribune. By having the apartments on school grounds, educators hope to connect seniors with children in need of nurturing.
–Les Shaver
Gender Gap
Cookie-selling season is over, but the Girl Scouts are certainly keeping busy. Commercial Real Estate Women, a national trade professional association, is working with local Girl Scouts and other groups in 19 U.S. markets to introduce girls to career opportunities in the historically male-dominated real estate industry. Junior high and high school girls will take hard-hat site tours, learn about the leasing and management process, and shadow industry professionals.
–Rachel Z. Azoff
View With a Room
Residents of the Odyssey Condominium in Arlington, Va., can keep a close eye on the outside world, thanks to a 13-story glass curtain wall offering panoramic views. The 274-unit building, which opened in April, boasts a rooftop pool, a fitness center, and about 6,500 square feet of retail space. The project was developed by Monument Realty and Lehman Brothers and designed by Shalom Baranes Associates Architects.
–Rachel Z. Azoff
Reversal of Fortune
Conversions turn back to apartments.
For well over a year, South Florida has faced a glut of projects slated for development or conversion to condos. Finally, the conversion pipeline has backed up, and at least six projects, totaling 1,551 units, are returning to the for-rent market, according to Jack McCabe, CEO of McCabe Research and Consulting, a market research firm in Deerfield Beach, Fla.
One of the six, the Gateway Club at Orchid Lakes in Boynton Beach, actually had a grand opening sale, but that didn't go too well, according to McCabe. He says the main reason for these kinds of problems is supply–specifically, the 62,804 units in 22 complexes that have been converted over the last few years. Now, converters are offering concessions, like a year's mortgage payment, a year's association fees, a 5 percent commission for realtors, and upgraded stainless steel kitchen packages to entice buyers.
Dick Donnellan, CEO of Apartment Realty Advisors, a broker based in Boca Raton, Fla., noticed the slowing in the final quarter of 2004. "The deals aren't selling as quickly as they used to," he says.
The beneficiaries of all of these condo conversions have been apartment owners. Both Donnellan and McCabe say they've seen rent increases in the 30 percent range.
Even with rent increases, there's still debate about whether properties bought for extremely low cap rates as condos can survive as apartments. "These deals can pencil out as apartments with the right financing," Donnellan says. "Obviously, the deals that are highly leveraged are more vulnerable."
–Les Shaver
Cost Crunch
New York looks for new funding sources.
After years of watching expenses like utilities and payroll go up while support from the federal government goes down, the New York City Housing Authority decided to take action. In a new plan, the agency took steps to stabilize its financial health.
Since fiscal year 2001, the NYHCA has spent $414.4 million on expenses not reimbursed by the federal government. With a 42 percent increase in utility costs, a 752 percent increase in pension costs, and a 29 percent increase in personnel costs, the housing authority finds itself in a bind with its 21,000 nonsubsidized units.
Most affected by these changes may be the 27 percent of tenants in New York City's subsidized housing who make the highest incomes (their average is $67,367) and spend less than 30 percent of their income on rent. In some cases, their incomes have increased since they moved in some 20 years ago, but their rents have stayed stable.
The agency has always charged residents for unreserved parking on its property, but the annual fee was only $5. The new charge will be $75 a year. Increases in electricity and water costs caused the authority to place a surcharge on appliances that use more electricity. Residents with these appliances pay more monthly. The agency also is increasing the fees on things broken by residents. "We haven't increased those fees since 1989," says Howard Marder, a spokesman for NYHCA.
David A. Smith, president of Recap Advisors, a Boston-based company that provides financial services for affordable housing, says other housing authorities are facing the same problems as New York's, and that external forces are causing these issues. "The federal government has been shortchanging the system for three or four years now," he says.
–Les Shaver
Executive Feedback
What ancillary services give your company the biggest bang for the buck?
A: "The ancillary services that give us best bang for the buck are charging for parking, creating storage spaces, charging pet rent and nonrefundable pet deposits, renting roof space for cell towers, sharing revenue with cable, Internet, and phone services, converting carports to 'garports' (enclosed carports), and building standalone garages." –J. Scott Morrison, senior vice president, Legacy Partners Residential
A: "Our best bang for the buck ancillary [income-generating] service has been pet rent. We've developed a very comprehensive program that allows for many breeds of dogs (with proper documentation) and other house pets. This has not only generated significant revenue, but it has also improved our resident retention rate." –Dan Lieberman, president, Horizon Management Group
A: "Delivery of zero-cost ancillary services provides the most bang for property owners. Utility reimbursement generates the absolute greatest revenue. Revenue shares for cable, Internet, telephony, satellite, wireless Internet, and credit card fee participation are also excellent sources. We also capitalize on in-place assets (e.g., value pricing, permitted parking, storage, corporate units, and pet rent)." –Dennis Treadaway, president, FPI Management
Project of the Month: Legacy Fountain Plaza
San Jose, Calif. Most urban infill sites present a challenge to be reckoned with. But with extensive planning and research–and a little patience–tackling urban infill properties isn't as harrowing as one might think. Just ask real estate developer Legacy Partners and architectural firm Newman Garrison Gilmour + Partners (formerly Meeks + Partners).
The team joined forces to provide a distinctive mix of urban living opportunities in San Jose, Calif., and relate it to the surrounding city elements. The result was Legacy Fountain Plaza, a Mediterranean-themed luxury mixed-use residential complex containing apartments, for-sale townhomes, and live/work lofts.
But there were some knots to untie in the process. An old railroad yard and a blighted city park stood in the project's way. But building a new project alone created opportunities to revamp the isolated park. "The development ... created strong street scenes with architectural statements and landscape and usable open space for its new residents," says Dave Gilmour, president of planning for Newman Garrison Gilmour + Partners.
The 367 luxury apartments and 65 townhomes are situated throughout the 10-acre site to maximize density on the long, narrow property. The project spruced up the street scene with the townhomes facing the park, while the parking structures were placed as buffers to the rail line. The complex features large windows, plus entry stoops and courtyards to encourage a pedestrian-friendly lifestyle. Indoor amenities include 9- to 17-foot ceilings and oversized walk-in closets. The courtyards feature a fountain focal point–one of the property's big eye-catchers.
One-, two-, and three-bedroom units range from 582 to 1,430 square feet. Monthly rents range from about $1,200 to $2,400. Legacy Partners is the builder and manager of the development, which opened in August 2004. Its occupancy rate is 93 percent.
–Abby Garcia Telleria