At $4.4 billion, AvalonBay Communities' development pipeline is the highest it's ever been in company history. Of that total, $1.4 billion is under construction and $2.98 billion is in the planning stages. How did the Alexandria, Va.-based apartment REIT make this happen? By buying in good times and bad, just like the smart long-term investor that the company is.
"When things weren't good–in '01, '02, and '03–we never took our eyes off the ball," says William McLaughlin, AvalonBay's senior vice president of development. "We said this is great real estate, and we are going to put it in place in a good market, in a bad market, and in a market someplace in between. We are going to own [the property] for 10 to 15 years, and therefore the goal is to put good real estate in place irrespective of the market cycles."
New REIT projects include UDRT's Mandalay on the Lake in Texas
Photo Credit: David X. Tejada
The strategy is paying off. As rents and occupancies rebound, AvalonBay is delivering new units in strong markets such as Los Angeles and New York.
Of course, AvalonBay is not the only apartment REIT that has been thinking strategically about land. Despite several years of a weak rental market and ever-increasing land prices, a number of apartment companies have built surprisingly substantial development pipelines (which typically cover a five- to seven-year period).
During the last six months alone, public multifamily REITs have increased pipeline values for their projects under construction by, on average, about one-third, according to an industry report recently released by New York-based Moody's Investors Service. And, over the last 18 months, those values have nearly doubled.
"Certainly with today's lower acquisition yields, it makes sense at this point in the cycle for multifamily REITs to be engaged in some kind of prudent development," agrees Christopher Wimmer, a real estate finance analyst at Moody's.
AvalonBay's Avalon at Chestnut Hill in Massachusetts
Photo Credit: AvalonBay
While there are real advantages to developing versus buying, it still hasn't been easy for these public firms to find development opportunities–not even with today's improving apartment fundamentals. "There are a lot of factors working against you in this industry," says Brad Griggs, executive vice president and chief investment officer of BRE Properties, a San Francisco-based apartment REIT with a $1.1 billion dollar pipeline. "I've seen more impact fees ... higher construction costs, a lack of supply of new land available, and stronger NIMBY groups."
Numbers in millions (* Figures not adjusted to include Summit Properties, which Camden acquired in 2005)
So BRE, like other REITs, has relied on creative strategies to find land, such as applying to city programs for redevelopment and transit-oriented sites. To compete against for-sale builders, AvalonBay will pursue deals too complicated for the average condo developer. And United Dominion Realty Trust, a Richmond, Va.-based apartment REIT, has partnered with private developers like Lincoln Property Co. and JPI.
Despite such robust pipelines, analysts generally aren't concerned about potential oversupply in the market. "When you look at it at the national level and at the submarket level, we see little markets where we have concern about supply issues at least for the next two or three years," says Craig Leupold, principal of Newport Beach, Calif.-based Green Street Advisors. "We think of this as an outstanding external growth opportunity for the apartment REITs. The greatest way to add value is through development."
–Rachel Z. Azoff
Welcome Back
Development talent returns to the rental market.
A talented development team is critical to building a strong construction pipeline, but finding such expertise hasn't been easy for apartment firms recently. As the condo market boomed, a number of development employees switched from rental side of the business to the for-sale side in search of better opportunities and more money. With the rental market rebounding, though, job candidates want back in on the apartment action.
"We were able to pick up a couple good players out of the home building flight of employees [back to the rental side]," says Brad Griggs, executive vice president and chief investment officer of BRE Properties. And the company now has the chance to choose from a second wave of former home builders. "We're seeing more and more guys coming back."
To maintain this newly refreshed development pool, apartment firms are focusing on employee retention through competitive benefits and internal growth opportunities. "We have tried to build good bench strength over the years by hiring freshly minted MBAs or people at entry-level positions in our development staff and have them grow over time with the company," says William McLaughlin, senior vice president of development for AvalonBay Communities.
–Rachel Z. Azoff
Hefty Tab
Did you get sued this year? If your answer is, "Yes, 10 times," then you must be in real estate. According to the U.S. Litigation Trends survey from law firm Fulbright & Jaworski, the average American real estate company annually faces an average of 10 separate lawsuits pending in U.S. courts. As a result of these suits, real estate firms spent an average of $389,000 on litigation last year. Surprisingly, real estate had one of the lowest average numbers of pending lawsuits across the industries surveyed.
–Les Shaver
Whirlwind Tour
Photo Credit: Sares-Regis Group
Jeff Stack, managing director of the Sares-Regis Group, participated in a Pentagon-sponsored weeklong tour of U.S. bases in the Middle East and Southwest Asia. The trip was designed to give civilians a first-hand look at U.S. military personnel and national defense strategies. Stops included military bases in Kuwait, Qatar, Bahrain, plus the USS Iwo Jima. "The quality of our military leadership today has improved dramatically since Vietnam," says Stack, a Vietnam veteran. "Not only are they brave, they are more highly educated than ever before. I've returned home to Orange County with renewed faith in the future of our great country."
–Rachel Z. Azoff
Bright Idea
The Philadelphia Housing Authority is greening its properties one light bulb at a time. The agency is replacing every bulb in its 17 senior communities with a compact fluorescent version. If the initiative proves to be successful, the agency will install fluorescent bulbs at its family developments.
–Rachel Z. Azoff
Lucky Break
Though Hope VI funding is perennially on the chopping block, HUD did grant $71.9 million in October to four housing authorities for replacing blighted homes. Housing authorities in Niagara Falls, N.Y., Easton, Pa., and Beaumont, Texas, each received grants of $20 million, while Kingsport, Tenn., received $11.9 million. Grantees were selected from a pool of 26 applications from public housing authorities across the country.
–Les Shaver
Big Haul
CB Richard Ellis Group has agreed to buy Trammell Crow Co. for $49.51 per share of common stock in cash. The deal, which will close in late 2006 or early 2007, is valued at approximately $2.2 billion. The new company will have combined pro-forma 2006 revenues of approximately $4.4 billion and 21,000 employees and would be the first commercial real estate services company to qualify for the Fortune 500 list of the largest U.S. corporations, according to CB Richard Ellis.
–Les Shaver
Football Frenzy
Photo Credit: Capstone Development Corp.
Developers are helping die-hard football fans get closer to the action. A number of condos are popping up near college football stadiums. Capstone Development Corp., a Birmingham, Ala.-based student housing developer, has a line of condos geared specifically to these sports-crazy alumni. Its latest project: Fieldhouse-Manhattan Condominiums, a 24-unit community in Manhattan, Kan., just 450 yards from the Kansas State University stadium. Prices start at $199,900 for a two-bedroom unit and $249,900 for a three-bedroom. Go Wildcats!
–Rachel Z. Azoff
Game of Risk
Report highlights potential problems for multifamily.
In its fall 2006 Real Estate Capital Markets Industry report, Deloitte & Touche USA, a consulting firm based in New York, sees commercial real estate–including multifamily–as an attractive investment early in 2007. But the firm does see potential trouble spots.
Source: U.S. BEA, Blue Chip Economic Indicators
"Risks clearly are greater than in recent years," the report said. "Headlining the list: slower economic growth, compounding debt, rising interest rates, and an uncertain consumer spending outlook."
"I worry about the job market," says Dennis Yeskey, national director of real estate capital markets for Deloitte. "The job market is driven by business investment, which has been unusually mild during the recovery." If business investment slows even further, Yeskey fears that job growth will stall. "If job growth slows, it would take into the second quarter of next year to see an impact on the apartment market," he says. "If that continues into first part of 2007, we may change our outlook for apartments in the second half of 2007."
Ron Witten, president of Witten Advisors, an apartment industry tracking firm in Dallas, forecasts moderate growth for the apartment industry in 2007. "The only downside would be some pretty dramatic deterioration in the housing market," he says. "We do think there's likely to be softness in home prices." –Les Shaver
Too Close for Comfort
Section 8 voucher holders live in clusters in many cities.
In East Charlotte, N.C., a group of homeowners noticed something that troubled them: Too many people holding low-income housing vouchers were moving into their neighborhood. It sounds like typical NIMBYism, but The Charlotte Observer examined the problem–and discovered that about four of every five Section 8 residents lived in one of 10 ZIP codes with high crime and blight. Meanwhile, the more affluent ZIP codes in the city housed no Section 8 voucher holders.Unfortunately, affordable housing experts say such clustering is common, despite the fact that vouchers are intended to avoid that very result. "I think every city and housing authority is concerned about their ability to provide opportunities to enable families to live in places other than the lowest-cost parts of their jurisdiction," says Gene Rizor, vice president at Quadel, a Washington, D.C.-based firm that provides direct management, consulting, and training services to the affordable housing industry.The main reason: The federal government's lack of support for the Section 8 voucher program. "Unfortunately, as HUD reduces the local administrators' ability to raise rent levels through funding constraints, the [housing choice voucher] beneficiaries are increasingly driven into lower rent areas, which often equates with clustering," says Conrad Egan, president and CEO of The National Housing Conference, a public policy and affordable housing advocacy organization in Washington, D.C.–Les Shaver
Executive Feedback
How do you fire a fee-management client?
Dave Woodward
"Sometimes fee clients just aren't a good fit for your organization, and 'firing' them can actually be a really positive move for your company. The best approach is to let them know that you appreciate their business, but that it is no longer a good fit for your organization and explain why. (They need to hear the truth). Then, offer to transition management as smoothly as possible, and whatever you do, don't burn any bridges. It's a small industry, and you never know who you'll be working with down the road!"
–Dave Woodward, managing partner and CEO, Laramar Group
Bill Donges
"It is important to send proper written notice, per the terms of your contract, and to meet in person with the client to review the reasons for the change. It is extremely helpful to offer a replacement fee manager recommendation at the time of the meeting."
–Bill Donges, CEO, Lane Co.
Steve Heimler
"Many clients do not respect the job being performed by third-party apartment managers. As a result, when terminating these relationships, the corporate and site-level staff have [higher] levels of motivation, desire, and effectiveness. It is also a great method to communicate this matter to the client, who [often] then chooses to behave."
–Steve Heimler, founder and CEO, Stratus Real EstateProject of the Month: Mission Creek Senior Community
San Francisco
Courtesy Mercy Housing
The Mission Creek Senior Community, located in San Francisco, Calif., is one of the most unexpected senior housing properties in the nation. Unlike most senior communities, Mission Creek offers a more contemporary, urban look with metal panels, textures, larger windows, and balconies. (It was designed by San Francisco-based architecture firm Hardison Komatsu Ivelich and Tucker.)The developer of Mission Creek–Mercy Housing California, a national nonprofit affordable housing organization headquartered in Denver–wanted to pursue a different design concept from more traditional senior housing projects so the property would blend better with its more contemporary neighbors. So Mission Creek now boasts a cool exterior as well as an assortment of services for seniors, including frail elders and very low-income seniors.
Courtesy Mercy Housing
Amenities at the 139-unit property include a public library and an on-site Adult Day Health Center, which will include skilled nursing services, occupational and physical therapy, a meals program and nutritional and recreational services. The health center will not only serve Mission Creek residents, but also seniors in the community at-large.The rent? Just 30 percent of the senior resident's income. Not surprisingly, the complex (which opened earlier this year) was completely occupied as of May, according to Sharon Christen, a housing developer at Mercy. And there's more to come. Mission Creek is part of a mixed-used development that will feature retail, commercial and entertainment venues and more residential housing.
–Abby Garcia Telleria