Demand may dwarf supply; the economy may show signs of life; holders of cash may be falling all over themselves to invest it in new and improved multifamily communities; homeownership may even lose its dominance as the American Dream incarnate. Still, as any smart property manager can tell you, a good year is made, not born.
Like early 2011, this year’s onset has shaped up like gangbusters—fundamentals, sentiment, and economic drivers are kicking in nicely. However, also like last year, property managers are going to have to navigate some tricky, possibly treacherous, waters to bring in the payload owners and stakeholders expect.
“We are cautiously optimistic,” says Keith Dodds, senior vice president of marketing for Denver-based real estate investment trust Aimco.
Caution? Last year, the pros called for average rent growth of more than 4 percent nationwide. Properties here and there achieved that kind of growth.
Most didn’t. Overall effective rents grew by an average of just 2.3 percent last year, according to New York–based market research firm Reis.
What’s more, the gremlins that bedeviled 2011 haven’t gone anywhere. Economists still worry about a debt crisis in Europe and conflict in the Middle East. Politicians fight in Washington—and it’s an election year. What if the “recovery” this year turns out to be as mediocre as last year?
Some property managers succeeded in last year’s up-and-down environment, plodding along in the toughest real estate markets and winning strong rent growth in the nation’s growing number of solid markets. Many interviewed for this story saw average rents grow by 4 percent or more throughout their portfolios. Here are five critical tactics that helped the winners overcome market obstacles, and what other managers and owners should do to optimize their property outperformance in 2012.
Power Up Your Rents
The decision to raise rents can be fraught with worry—especially in tough economic times. Residents can always look for other options, resulting in more empty apartments. But computerized revenue management systems like YieldStar and Rainmaker Lease Rent Options are helping to dispel the anxiety. The programs, designed to help property managers set rents, employ industry-standard variables such as vacancy rates to help make the rent decision.
“[Revenue management] has been helpful in forcing the issue on pricing,” says Brad Forrester, president and CEO of the San Diego–based ConAm Group of Cos., which, like most managers interviewed for this story, uses revenue management across its portfolio of properties.
This year, in most markets, low vacancy numbers will lead landlords and their revenue management systems to push rents, despite the cloudy economy, with a promising fourth quarter 2011 revealing that the average apartment vacancy rate nationwide had fallen to 5.2 percent, according to Reis. That’s the lowest it’s been since 2001.
And it’s not just a majority of markets that improved. Every apartment market tracked by Reis had fewer vacant apartments and higher average rents over the year ending in the fourth quarter of 2011.
With trends like this, managers like ConAm can trade slightly higher vacancies for higher rents—and still improve revenue overall.
“We don’t see a reason to take the foot off the pedal,” Forrester says.
Experts say roughly a million young people graduate from college every year, and these ex-students are doing surprisingly well despite the tough times: The unemployment rate for college-educated people in their mid- to late 20s is now less than 5 percent. It’s become a cliché that walkable urban neighborhoods are more likely than nonurban properties to appeal to these young renters, who are increasingly dominating the rental market. After all, it’s easier to rent an apartment that’s within walking distance of amenities—say, a good cup of coffee.
Like most of the apartment companies contacted for this story, Minneapolis-based Steven Scott Management plans to keep buying, building, and rehabbing apartments with a focus on walkability and urban living. “Walkability is important,” says company president Barbara Halverson. Important enough that she refers to walkability scores from data site WalkScore.com in her marketing efforts. The company’s 132-unit E2 property, for example, located on the main drag of St. Louis Park, Minn., should be finished by late 2013.
To attract the Facebook generation, property managers are also focused on social media. ConAm maintains a Facebook page in part to create opportunities for residents to make connections. And all the property managers we spoke to monitor any mentions of their communities on websites from Yelp to Twitter, acting quickly to fix any service problems the sites bring to their attention.
Student housing provider Grand Campus Living, based in Dallas, uses “push” marketing formats, such as mobile and text messaging, to reach young prospects who will soon likely become renters in the conventional apartment market. The firm typically sends a text or two a month to potential residents who visit their properties. The service costs a little over $125 a month for a total of thousands of texts throughout the Grand Campus portfolio. The company also pays careful attention to search engine optimization for its ads on Google and Facebook, to help make sure those ads are seen by the right target customers.
For these younger renters, fast Internet service is one of the most important amenities an apartment community can offer, says Grand Campus president JoAnn Blaylock. As a result, every Grand Campus student housing unit is hard-wired to provide very high-speed Internet access, and wireless Internet covers the rest of the property.
Sell the Service
Property managers succeed, even in the toughest apartment markets, in part by focusing on service. For example, in Flint, Mich., Indianapolis-based Buckingham Cos. has positive—if slight—rent growth. Buckingham no longer offers concessions to potential renters. Yet the percentage of its occupied apartments in Flint is now in the mid–90 percent range, up from the mid-80s during the financial crisis. The secret?
“We try to attract the best tenant we can,” says Alexandra Jackiw, executive vice president for Buckingham. That means, in addition to following strict qualifying criteria, maintaining lots of interaction with residents, to continually gauge their needs while building a reputation as a customer-oriented management firm.
Managers at ConAm’s Renaissance Villas in Las Vegas, where occupancies are at roughly 95 percent, likewise focus on the value of their services and professional maintenance.
“You’ve just got to be on your game every day, fighting for every resident, every renewal,” says Forrester. “It’s an understatement to say people are price-sensitive.”
Up the Ante
Many landlords are raising rents based on upgrades to their properties—often beginning with highly visible work on the common areas. Average rents increased 8 percent last year at the Presidential Towers, for example, a 2,346-unit property just west of the Chicago Loop where manager Waterton Residential just finished off a rehab of the community’s common and retail spaces. Even with these sharp rent hikes, occupancy rates are in the mid–90 percent range at the 35-year-old Towers, where a series of “nooks and communal areas” allow residents to enjoy free high-speed wireless Internet service.
“The past management discouraged hanging out in common areas,” says Greg Lozinak, executive vice president of Chicago-based Waterton. Under Waterton’s plan, however, the Towers’ spaces create opportunities for residents to make connections, from scheduled events and parties to impromptu individual encounters with fellow laptop users.
These types of spaces appeal especially to young renters, who are “more communal” than other demographic groups, says Lozinak.
Sometimes even competition from other apartments can be a springboard for upgrading a community. More than 400 new rental apartments are now opening across the street from Emery Bay, ConAm’s apartment property in the Lewisville neighborhood of Dallas. But ConAm turned the new property into an advantage. After a year of competition, Emery Bay is 96 percent occupied, and it even increased rents by close to 8 percent last year.
“We want to make sure that when someone drives by to see the new development, our project catches their eye,” says Forrester.
To lend Emery Bay more curb appeal, ConAm spent $200,000 in early 2011 to give the 13-year-old property a new coat of paint. ConAm also took advantage of the $150 to $200 difference in price between Emery Bay’s units and those of the competing new Hebron Station apartments across the street.
The number of new apartments opening will rise in 2012, and rise higher in 2013. Certainly, the number can’t get much lower. Only 37,678 new apartment units came on line nationwide in 2011, the lowest annual figure for new completions in 31 years, according to Reis. Still, new construction is returning, starting with the healthiest apartment markets, and managers of existing apartment communities will have to compete.
“I don’t remember a time when I’ve seen so much development and so much excitement,” says Steven Scott’s Halverson. “There’s an amazing number of units scheduled to start construction in 2012 and 2013.”
Of course, Halverson’s market is Minneapolis, one of the strongest rental markets in the country, with an occupancy rate of 97.5 percent in the fourth quarter of 2011. The cost of land and regulatory barriers there usually make it difficult to build, and affordably priced single-family homes present more competition to apartment managers than do other apartments.
“The biggest reason residents leave is to buy homes,” confirms Halverson. “We have a stock of single-family homes at affordable prices.”
But for now, even in Minneapolis, competition from for-sale homes also seems low.
“We aren’t seeing much [competition from for-sale homes] this year,” says Halverson. “There’s a loss of favor with homeownership. It’s harder to buy a home [now], and there’s more of a downpayment required.”
The competition is more serious in markets where unsold and foreclosed housing stock and a crippled economy pressure apartment managers. Indeed, roughly four million home loans currently are either in foreclosure or more than 90 days late in their payments. That’s 7.9 percent of home loans in the third quarter, according to the Mortgage Bankers Association of America.
In the early days of the crash, a mix of vulture investors and desperate owners offered homes for rent, creating a “shadow market” of rental units to compete with more-traditional rental properties. But not everyone sees these unorthodox rentals as a serious threat.
“I think the shadow market is everywhere, but it’s overblown,” says Buckingham’s Jackiw.
Take the property managed by Buckingham in Flint, Mich. Of the residents who moved out last year, only 3 percent left to rent a home.
“I wouldn’t consider single-family rentals competition in Flint,” Jackiw says. “Many of these homes are in some state of disrepair.”
Unsold and foreclosed condominiums provided more serious competition during and right after the crash. By now, however, most of those condominiums put up to rent have been absorbed by the rental market.
Just ask Waterton Residential. Last year, the company bought nearly all of the condominiums at Mondial, a fractured condo in Chicago’s River West neighborhood. Waterton now owns 138 of the 141 units in the building.
With top-end appliances, granite or quartz countertops, and patios with panoramic views, the condos at Mondial were in direct competition with Chicago’s most luxurious rental apartments. But now, they’ve been converted to apartments themselves and are nearly fully rented, with a low rate of turnover.
Bendix Anderson is a freelance writer based in Brooklyn, N.Y.