In case you were unable to take part in what has become one of the multifamily industry’s annual highlight-reel leadership events-- the just-concluded Multifamily Executive Summit in Vail, Colo.--we wanted to share a flavor of the conference, while observing the off-the-record ground rules we set up so that our executive speakers can talk freely and frankly with one another. The top-line take-aways went something like this.
You could say that the theme that over-arched the MFE Vail Summit was a blend of a “follow the money” notion, and--more powerfully--take some chances with capital and other invested resources, based on the swell of demand for multifamily housing that has changed the sector’s mentality from defensive to an offensive mode. Even as property owners and managers test the elasticity and proficiency of their operations in a relentless pursuit of net operating income, the imperative is to be aggressive early. Debt and the fresh memories of its damage still weigh heavily on past, present, and prospective investors and lenders. However, barring event-risk driven disruptions to current trends and traction, the market’s pointing to big-time opportunity—but not necessarily for one and all. More than ever, the enemy is a lack of intelligence into how to leverage net operating income excellence into sound new investment tactics.
So, multifamily’s challenges orbit around the balance of four powerful and often cross-purposed interests as they work out of over-leverage toward unencumbered profits, and leading developer owners and managers—large, small, national, regional, or local—need to strike a balance among them. They are, first of all residents, the very essence of demand; secondly, investor(s) and stakeholders, whose skin in the game must generate returns or they’ll take their money somewhere else in the investment spectrum; third, policy-makers who hold sway over the amount and manner in which Uncle Sam channels money toward meeting the nation’s housing needs; and lastly, one’s own associates and employees, whose focus, effectiveness, and enterprise can
Our first session focused on ways technology is transforming the value proposition of renting, and porting better practices and capabilities through every silo of a property management organization.
· Operationally, property owners large and small are driving relentlessly and opportunistically to connect and engage with both current and prospective residents via web-enabled self-service at every touch-point in the rental process. The greater insight into resident populations, prospect segments, and granular individual preferences and behaviors becomes leverage for managers and owners to price their doors more aggressively while the irons of demand are hot.
· We heard from a senior-level panel of executives, each of whom is committing to more investment in integrative tech applications that “connect the dots” between on-site resident services—ranging from access and connectivity amenitization to fuller-self service in renting and renewal, to communications around rent increases, to ancillary “neighborhood and community connections—and firms’ back-office services and strategies, such as revenue management systems and cost-control systems for energy-use, etc.
· Culturally, our panelists recognized that their organizations needed specific training and holistic goal-setting around adapting to technological solutions, since fear of change remains an obstacle to the kind of transformation.
· Each of our senior-level executives spoke of specific new tech-driven programs and platforms being piloted or rolled out through their enterprises, some focusing on leveraging customer satisfaction into new resident referrals, others driving tech-platforms performance into operational efficiencies and cost-savings, site maintenance, and others looking to change the very nature of skill sets and talent deployment on-site as technology’s role increases throughout the rental spectrum.
Our second session had a capital access focus.
· What becomes evident in any high-level conversation about developers and property managers’ access to equity and debt to expand, add value, or convert existing buildings into housing is that the fear and damage of housing’s and the economy’s melt-down years remains an important factor in capital’s being put into place in the market. Our panelists’ refrain was that despite enormous troves of liquidity looking for yield, fear narrows the channel and flow of that money into few core markets and product opportunities.
· Lending decisions among the power players in the space—in both the private sector and among the government sponsored enterprises--track back to two factors right now. 1) the location and “sexiness” of the project in terms of its targeted urban, core market, its proximity to transportation, and its high-end, high-rise positioning; and 2) the track record and financial profile of the sponsor.
· Our panelists said that on the one hand more types of money for more types of deals is becoming current and programmatic in the market, but there are still high-fear barriers constraining its actual deployment—except where the loan-to-cost ratios are designed around very low risk tolerance
· Clearly, as an asset class, multifamily remains one of the more solid, reliable investment categories, certainly in real estate, but it seems that investors and lenders tar the segment with the same brush they use for the most toxic of sunk deals, which makes them hesitant and reluctant to look at new opportunity for what it is.
Leadership and strategy, the 40,000-ft. view was the agenda of our third session.
· Event risk—i.e. could gas prices go up enough to impact current and future residents’ ability to pay rent? Or, possibly will rising gas prices play in favor of for-rent property owners and managers?
· Land prices failed to reset. In contrast with other economic downturns, real estate prices held, while developers and construction companies sharply reduced labor and materials expense to achieve cost and price reductions.
· Overbuilding—if there is frothiness in select markets, none of those who are playing in those arenas will admit it. Overall, the conviction that the nation is short some 300,000 of rental units to meet its current and immediate future housing needs may shield business leaders from sensing they’re part of any bubble in any of their markets; each of them sees a differentiable position or segment in their arenas, sustainable by virtue of the fundamental demand they see for their offerings.
· One big player characterizes the activity in the Sexy Six to be “aggressive,” but not overbuilding. Another points out that a natural inhibitor to bubble activity, even in some of the more hyperactive markets, is the fact that a new variable is on the table in this post-downturn era, i.e. that “banks are under siege” and they are constraining the free flow of liquidity into markets.
· Another factor that may serve as a natural limiter of overbuilding is the immediacy and transparency of information. This means that a momentary competitive edge seized by an organization is fleeting, and may actually cause course-corrections to occur in reaction to herd-mentality development. So when a great big developer says there are plans to bring 40,000 new doors into a market, the firm may only get half-way there before they’ve attracted a crowd, which would cause the original company to check up on plans for the balance of the units.
· Broadly, our panelists indicate that, where possible, being aggressive “early” in the market turnaround trajectory is practically the only way to ensure an edge and a financial advantage in a market.
· Strategically, most big players are rethinking where they invest their capital at the site level, most of them focusing more on connectedness, internet speed, do-it-yourself platforms, and other technological optimizers vs. over-featuring and amenitization in the units and common spaces.
· From an energy and sustainability standpoint, the dilemma for enterprise multifamily players is quantifying the return on capital invested for above-code energy-saving technologies and development. “We haven’t seen residents indicate they’re willing to pay” for the cost differential to develop sites that are above code, one of our CEO panelists said, reflecting a broader sentiment. When code changes, that’s when it’ll be a responsible way to use investors’ money.
· Vis a vis access to capital, the comments of our CEOs mostly affirmed that lenders have become very disciplined around underwriting the quality of the sponsor, and that if there’s any error, it’s in the fact that “they all want the same markets: urban, transit-oriented-development, high-rise, high-end market.
· Trying to execute—on a project level capital model—on a suburban, garden-style product in a market with solid economic fundamentals is very difficult, and requires an inordinate amount of equity in the deal.
· On a large-scale basis, our panel observed that the “merchant-building” model in multifamily is a “flawed” model from a sustainability standpoint. Occasionally, raising capital to build apartments and sell to a willing buyer in the short term may work, but the “build-and-sell” model won’t work going forward as an exclusive business model.
· The concluding sentiment expressed was that, after a robust run-up period, long-term return expectations have entered a period of settling back to much more reasonable levels for invested capital, and that internal rates of return targeting 8% or 9% may become more of a norm. This, because of slower growth globally among emerging markets, and less opportunity for high yields in other parts of the investment spectrum.
Our fourth and final session highlighted real-world vs. theoretical strengths and weaknesses in development opportunity.
· A big red flag these days among developers is any assumption that an entitlement green-light from municipal decision makers automatically means a project will pencil profitably.
· Two, just because investors agree to fund a project doesn’t guaranty its viability as an operating asset.
· On the other side of the coin, many projects that would do well as properties are going unfunded, and there are big opportunities for those who can assemble the capital resources to move assertively while the getting is good.
Overall, the strategic intelligence, thought-leadership, progressive thinking, and sense of grace and humor that characterized our program at this year’s Multifamily Executive Leadership Summit at Vail made the event a perfect blend of subject-matter, corridor talk, and networking. We want to thank our friends, the team of Doug Bibby and the National Multi Housing Council for making this a one-of-a-kind leadership event for yet another year. I also want to thank our team—Michael, Laura, Kristina, Les, Jerry, Rich, Rob, Paul, and Warren—for making us a proud host of the experience. Make a note to join us next year, March 7-9, 2013, at the Vail Cascades for what promises to be another world-class business leadership conference.