WITH CHALLENGED VACANCIES and rental incomes, many apartment owners just want stability right now, and some are finding that stability on military bases.

“In the military market, folks aren't losing jobs; operators at least don't have those kinds of pressures,” says Mike Rouen , managing director of military housing for Pinnacle Military Homes, a division of Seattle-based Pinnacle , an American Management Services (AMS) Co. Pinnacle owns and manages 21,700 military units for the Army, Air Force, and Navy in markets including Columbus, Ga., San Antonio, and the Washington, D.C., area.

Military base housing privatization dates back to The Military Family Housing Act of 1996 . The services found they were losing members because of the poor quality of outdated housing and recruited developers to renovate and, if necessary, build new homes. The military decided privatization was the best option since it was too diffi cult to get direct appropriations for this massive housing upgrade.

“Privatization has provided improvements without the military having to use appropriations dollars,” says Michael Defferding , executive vice president of Cleveland-based Forest City Military Communities , a division of Forest City Enterprises. The firm owns and manages 2,000 units of Navy and Air Force housing in the Midwest, Pacific Northwest, and Hawaii.

The developers own the projects for 50 years on a ground lease . “We have leasehold interest, and we can collateralize the mortgage,” Rouen says. “We use the money to either demolish and rebuild homes that are no longer serviceable or to make renovations to homes.”

Generally, the companies that have taken advantage of privatization are large firms including Forest City; Pinnacle; Arlington, Va.-based Clark Construction ; El Paso, Texas-based Hunt Building Co. ; and Dallas-based Lincoln Property Co.

“It is critical when the military turns housing stock over to an operator that the operator has ample experience and the wherewithal to train its employees to take over a block of assets,” says Reg DelPonte , executive vice president of Lincoln's Western region, which owns and manages 30,000 units for the Navy and Marine Corps . “There are lots of property managers, but few who can take over blocks of assets with 4,000, 5,000, or even 6,000 units.”

Off-Base Competition

But even the most seasoned of military operators are discovering that military unemployment and the greater challenges of the recession. Demand for military housing is generally stable, but outside supply can still pose a threat to occupancy. Military personnel receive monthly basic housing allowances which vary depending on rank and location and can be spent on housing of their choice—on and off base.

“Essentially we have to market to the service members and convince them that our communities offer them the best value for their housing allowance,” says Ron Hansen , a senior vice president for Philadelphia- based Michaels Military Housing , a division of Michaels Development Co., which owns and manages 4,500 military units in Maryland, Arizona, and Florida.

In some instances, Pinnacle has lowered rents and offered concessions at its communities to convince military members to stay on base. “The collapse of the housing market has meant that more houses are up for rent and the pricing for those rental units is down,” he says.

If service members can find housing cheaper than their allowance, they can pocket the difference. “If their housing allowance stays high and supply in the market outside the gate becomes available at lower prices, there's a potential stimulus to move off base,” Rouen says. “For people who are motivated by the security or convenience of living close to where they work, what happens in the outside market isn't a big factor. But for those who are motivated by monetary necessity, living in town becomes more appealing as the market becomes softer in town.”

Schools can also play a factor in the decision to eschew private housing on base for outside options. “If there is a shadow market that makes housing more affordable in a good school district, that impacts occupancy on base,” Hansen says.

Despite the allure of off-base living, occupancy remains high for military housing operators. While Lincoln's occupancy is roughly the same for both its conventional and military portfolios, Forest City remains 98.2 percent occupied at its Hawaii portfolio and about 94 percent throughout its military offerings—roughly 2 to 3 percent higher than at its market-rate properties.

The on-base support program for spouses who are married to deployed service members is a major reason why DelPonte says that the shadow market has only affected Lincoln to “a small degree.”

“For a lot of spouses, it's important that they stay near other military families while their spouse is deployed,” DelPonte says. “There is that sense of community when the spouse is deployed.”

Upcoming Opportunities

Unfortunately, there aren't a lot of major opportunities right now for apartment developers interested in military housing.

DelPonte says that the privatization efforts are about 95 percent complete, with approximately 195,000 units of a total of 200,000 planned units allocated for the Navy, Marine Corps, and Air Force. The Air Force is still privatizing housing at a number of its bases, grouped into four major projects, though the proposals were due in March.

But don't give up yet: Military housing providers say there could be another opportunity on the way. To date, privatized housing has mainly focused on families, but two Navy offerings for bachelors' housing could serve as a model for future rounds, according to Forest City's Defferding. Clark is building an 18-story project for bachelors in San Diego, and Hunt is building a similar project in Norfolk, Va.

“Privatization could move in the direction of bachelor housing,” Defferding says. “The business opportunity for building singles' housing for the military outpaces single-family housing because there are so many singles [in the military].”

And that could present an opportunity for smaller apartment operators to cash in on military housing. “When that opportunity happens, the projects may go to smaller, more regional companies because these will not be [large scale], 4,000-unit communities,” Rouen adds. Stand by.

Military Training

You may be the most competent apartment manager in your space, but you'll need to follow a new set of orders if you plan to enter the military sector.

1. Offer Services. Military housing operators must be prepared to offer more services than found in conventional housing. “We have deployed kids programs and spouse support group programs,” says Reg DelPonte, Western region executive vice president of Dallasbased Lincoln Property Co. “We have all kinds of activities on a monthly basis.”

2. Think Big. Military communities often dwarf a typical apartment building in terms of scope and size. “We have miles and miles of streets to maintain,” says Mike Rouen, the managing director of military housing for Seattle-based Pinnacle, an AMS Co. “Whether it's sewer, natural gas, or electrical lines, it's our responsibility. It's more like managing a small city.”

3. Navigate the Red Tape. Apartment developers and remodelers typically just deal with local governments and planning committees. But military communities often involve historic structures which add extra bureaucracy to the redevelopment process. “We have over 1,000 historic homes,” Rouen says. “You have to get involved with the state historic preservation office. When we change [so much as] a window pane, it has to be appropriate.”

Michaels Military Housing's Ft. Huachuca; Sierra Vista, Ariz.

Pinnacle Military Homes