Last October, former Greystar Real Estate Partners executive Tom Shelton became the new president of Irvine, Calif.-based Western National Property Management, a regional multifamily owner/operator and fee management firm with approximately 24,000 units in a largely Southern California portfolio. Western National announced earlier this month that the company was expanding its fee management business into the Phoenix market as part of a larger growth strategy across Arizona, California, Las Vegas, and Denver. Shelton spoke about that growth plan in an exclusive interview with MULTIFAMILY EXECUTIVE during the 2009 Multifamily Trends Conference, held during the Pacific Coast Builders Conference. MFE Senior Editor Chris Wood reports.
MFE: Tell me about Western National’s recent expansion into Phoenix. While Phoenix is a challenging market, you’ve said that the timing is also ideal for third-party expansion there. Can you elaborate?
SHELTON: We are in a market where people are looking for different ideas, maybe some creativity when it comes to marketing or advertising or a different spin on what it takes to be successful. Historically, anytime the market gets soft and creates challenges it’s usually good for third-party management. Self-managed owner properties that are not doing as well in a market that is challenging are more apt to make a change, are more likely to rely on partners with perhaps broader management knowledge and resources, a deeper personnel pool, more experience with marketing and advertising. Getting resident traffic, and catering to resident needs becomes more effective as you have a larger portfolio base to drive those experiences. Those things become more valuable to clients in a market that is not doing so well. MFE: What are the property level opportunities for success right now?
SHELTON: One of the things we will talk about on the panel today is that the condition of the market is demanding everyone to be better operators. There are ways to focus on that without spending a lot of money. We’re getting aggressive on renewals, going out 90 days before expirations. In today’s market we want to get them locked in for another 12 months. We need to reduce vacant days and push unit turns from a maintenance, service, and lease-up perspective. Our revenue has been flat as opposed to declining, and we attribute that in part to a decrease in vacancy days on the market. I think everyone can agree that the cheapest form of advertising is keeping the people in your units that are already there.
MFE: What do you think about some of the buzz here at PCBC that distress might not be as big as everyone thought it would be—that there may be more capital lined up to exploit distressed than there are deals to consume that capital?
SHELTON: It’s the great debate right now. We have not seen a lot of flinching on the part of banks and lending institutions. They seem less likely to rewrite loans and do cram-downs and moratoriums. At the end of the day, a lot of them seem to be deciding to just hold onto the real estate. I think a lot of people are surprised that there don’t seem to be as many opportunities coming that everyone was hoping for. Perhaps the pace is just slower. Six months ago, everyone was anticipating gluts of foreclosures, gluts of receiverships, gluts of note sales. It doesn’t seem like we’ve seen that yet, but I still have a sense that there is more coming.
MFE: Will Western National be a player as deals come to market?
SHELTON: We have a $250 million equity fund that we have raised that is committed, but we are of the opinion that values are still too unstable. Today’s good deal might end up being horrible in 12 months. We’ve seen some trades in phoenix, a couple of trades in Orange County. A lot of people are looking for valuation and cap rates to establish themselves. Once you see those benchmarks set, you’ll see more transactions, but the cast of characters is going to be different, not the GM and GMAC and all those equity guys from last time. I think you’ll see a lot of private equity players that you’ve never even heard of yet. We’ll be patient and wait for the dust to settle. I’m not sure this is the market where you want to be the first guy in the deep end. Regardless, you’ll still have to move quick and put significant equity at risk early in the process.
MFE: Submarket to submarket, how are rent fundamentals across your portfolio?
SHELTON: The balance of our portfolio is across Orange County, Calif., and we have been spoiled there with consistent 4 percent to 6 percent rent growth. Despite reports of -2 percent to -3 percent rent growth, we have stayed pretty consistent in terms of rent and occupancy. We are seeing some increased concessions. Lease-ups in Los Angeles are taking a little bit longer than we anticipated, and we are not quite hitting our pro forma rents there. Move-outs for homeownership will continue to affect us as affordability returns to the for-sale market, but I don’t think we’ll see anything like we did before. Multifamily is so tied to job growth that once we see some jobs return to the market, I think that will bode well for our business. Even if those are construction jobs tied to a recovery in multifamily, I think we will all be better off.