When Bob Murray joined KSI Management as president roughly one year ago, he had a pretty clear agenda: to grow the company, in part by tapping new sources of revenue.
Ancillary income is a key part of his strategy. “Whether you're managing high-end luxury units or the lowest of the low-income tax credit units, ancillary income is the only remaining uncharted field for additional, needed revenue,” says Murray. KSI is a Centreville, Va.-based company with 10,000 units.
Turns out KSI isn't alone. It's been tough in recent years to charge extra for any additional products or services, let alone raise the rent. In fact, experts say apartment owners have been absorbing additional costs and at times offering incentives to keep occupancies up. But as the nation continues its slow emergence from a less-than-stellar economic cycle, building owners are looking to find new ways to charge their renters for add-on products and services.
“For the past three years the market has been so mushy in almost every area—except South Florida and Southern California—that owners haven't paid much attention to ancillary income,” says Linwood Thompson, managing director of the national multihousing group of the brokerage firm Marcus & Millichap. In certain markets today, however, things are starting to tighten up, and owners will need to start thinking about ancillary sources again, he says.
So regional apartment firms and REITs alike are actively mining relationships with third parties that will provide products and services to residents while boosting multifamily companies' revenues. The spectrum of current and potential partners includes telephone and cable companies, washer and dryer vendors, cell phone companies that need real estate for antennas, and banks that operate automated teller machines.
It's clear that ancillary revenue shouldn't be overlooked. It can translate into higher values for properties that are sold, particularly in strong markets when sellers have the leverage to build ancillary revenue into their asking prices.
“If a market is a little tighter and buyers have to fight against each other, now they'll pay not only for ancillary income, but they will also pay for income they think they can get in the first 12 months of ownership,” says Thompson.
The availability and sophistication of ancillary income sources can directly impact a property's value as reflected in its cap rate, experts say. “If you're buying a 250-unit property that has an old infrastructure based on demand and residents' preferences, you would discount that property” by 25 to 50 basis points on its cap rate, says David Cardwell, vice president of capital markets and technology at the National Multi Housing Council in Washington, D.C.
The good news: Opportunities to develop ancillary income sources through services such as high-speed Internet appear to be on the rise. NMHC, for instance, found a 10 percent to 15 percent penetration rate of high-speed Internet access in suburban garden style apartments in 2000, says Cardwell. Today, based on anecdotal and other analyses, that figure is more in the range of 30 percent to 35 percent. “The revenue stream is increasing as demand for high-speed Internet is increasing,” Cardwell says.