If you ask Keith Oden what’s different about today’s customers compared with the first tenants he had 28 years ago, his answer would be simple: everything.
In 1987, Houston-based Camden Property Trust, which Oden co-founded along with Ric Campo, purchased Sunset Lodge as the first asset in the REIT’s portfolio.
“If you were to go visit that community today, it’s still there … . You wouldn’t recognize it as a competitive multifamily community,” says Oden, Camden’s president and trust manager. “By now, that community, on your grading system, would be a C- to a D. It had a very small clubhouse, a tiny workout facility, a set of free weights that kept walking off, and the apartment setup didn’t have washer/dryers.”
But at the time of purchase, the 240-unit Houston community was well worth the investment, Oden says. It was considered a B or B+ community and the amenities needed only light upgrades.
“I’ve seen the evolution of what things you’ve got to have as part of your amenity package,” he says. “It’s really driven by consumer preferences. At one point in our development history, if you didn’t have tennis courts you couldn’t be competitive. Today? About five or six of our properties have tennis courts, out of 200.”
It’s that constant evolution of what a renter perceives as important that keeps the apartment industry active in the arms race to amenitize buildings with the newest, hottest accessories and offerings.
“Just when you think you have it figured out, the consumer says they don’t want it anymore,” Oden says.
Like many other industry veterans, Related California executive vice president Gino Canori has also noticed a shift in the market’s development standards and customer’s preferences.
“This renter today is much more sophisticated,” Canori says. “They’re much more in tune with services and finishes—very much tech driven … It’s definitely not what it was 15 years ago.”
RAISING THE BAR, AGAIN AND AGAIN
With more than 230,000 apartments projected for completion this year, the majority are expected to be labeled as luxury.
However, not all luxury product is built equally. Amenities are playing a huge role in how high-end communities are branded and marketed. At a bare minimum, to be considered a luxury community a property should include the standard community amenities such as a pool, fitness center, and cozy community spaces with Wi-Fi.
But when a resident is looking past the granite countertops and stainless steel appliances, living luxuriously comes down to service.
“Luxury is also a state of mind,” says Pinnacle CEO Rick Graf. “Think of the hotel business: the Four Seasons and Ritz Carltons of the industry. They’re nice, but at the end of the day, it’s a hotel room. But there are certain things they do in those luxury lines that make you feel special—they make you feel like you’re a cut above everybody else.”
As many downtowns continue to boom with residents looking to live in urban epicenters, developers are racing to bring new product to the finish line and start filling units. And just as much of today’s development pipeline is concentrated on the highest price points, urban centers are the biggest beneficiaries of today’s building boom. So, even core properties that are just a few years old can run the risk of seeming like yesterday’s news, fighting to retain tenants as the competition ratchets up.
The Emerson, a Related property in downtown Los Angeles, was completed in January and at press time was about a third leased. The luxury apartment building is the only new construction community in the Grand Avenue neighborhood, Canori says. However, as much more new product breaks ground around it, Related will no longer possess a captive area of the market and will have to keep up with its neighbors to remain competitive.
But Canori believes the Irvine, Calif.–based company has the upper hand in being first. Getting a resident to sign a lease because it’s the only apartment building available in the area is relatively easy. The real challenge is getting that resident to stay once the lease is up. Canori says his team has that covered too.
“We’re providing a level of service that is better than anything else,” he says. “We allow people easy transfers within the portfolio; we have a full-time resident service specialist; we have a move-in personal assistant to help you with your move. There’s a tech concierge who will set up your Wi-Fi, Internet, and will even hang your flat screen on the wall.”
Graf agrees that providing an outstanding level of customer service is the best competitive strategy. Part and parcel to that, Pinnacle keeps a very close eye on a building’s reputation.
“If you have a good reputation, then that word spreads really fast, and even if you don’t, then that word spreads just as fast,” he says.
Oden’s strategy for keeping Camden relevant is to become part of the newest, latest, and greatest, to keep the churn of development going for a constantly refreshed portfolio.
“One of the ways to stay competitive is you continue to bring into the market new product that has what consumers are looking for,” he says. The developer, which was “We have the largest development pipeline in our company’s history.”
SMALL IMPROVEMENTS, BIG DIFFERENCE
Graf says there’s no doubt the B and C class communities are high in demand. “There will always be a demand for that product because not everybody can afford to live in the AAA property,” he says.
And that’s exactly what some operators are capitalizing on.
Downtown Indianapolis, for example, is booming with opportunity. Developers there delivered 2,120 apartment units in 2014, according to a report by Hendricks-Berkadia, a Phoenix-based advisory firm. The new units represent a 79.6% increase compared with 2013.
And as the popularity of living downtown grows, so do rents. Mark Juleen, vice president of marketing at Carmel, Ind.–based J.C. Hart Co., says new construction hasn’t increased competition for existing product. In fact, it’s done the opposite. By pricing out many renters, the higher end product has caused a trickle-down of the value propistion, helping to raise rents on older properties.
The Waverly, located in downtown Indy, was built in 2007. And while J.C. Hart is giving the community small cosmetic upgrades to keep up with wear and tear, the company isn’t totally revamping the common areas. The property is remaining nearly fully occupied nonetheless.
“Here, we have a product that’s 8 years old now, and we’re sitting on 97 and 98% occupied,” Juleen says.
A rising tide truly lifts all boats: As new product comes into the downtown Indy area, the value of the existing community increases with little effort.
“You’re trying to get that initial bang and that initial kind of buzz,” Juleen says. “You can still compete. You don’t have to be at the top of the rent spectrum. You can still compete and not have the ultimate amenity package.”
Meanwhile, Oden and the Camden team are also involved in renovating older properties so they don’t become B and C product. By the end of this year, the company will have spent about $240 million repositioning 25,000 of the more than 65,000 units in its portfolio. By upgrading the interior finishes on decade-old properties, Oden’s team has been able to achieve rents within $50 to $100 of new-construction building rents.
“When you can make the interior experience, the finishes, equivalent to what the new construction is, then the consumer sees the same value proposition as [in] the new construction,” he says. “It allows us to increase the rents to pay for the cost of those improvements. We don’t get what the new construction would get, but we get pretty close to it.”
Defying Fear of Oversupply
Meanwhile, location will always be the driving factor in the success of any community. And even in markets where there’s a fear of overbuilding or over-saturation of luxury product, projects in the hippest, hottest locations are sure to stand out.
Reis estimates, for example, that Nashville, Tenn., will be the hottest construction market of 2015, with 3.8% growth of the overall stock. The Music City is estimated to have 4,327 units coming to completion this year.
Although some analysts fear Nashville is at risk of oversupply, developers are moving forward full steam ahead.
In late 2014, Charlotte, N.C.–based Crescent Communities shook off the forecasts of oversupply and broke ground on a new development in the downtown Nashville area with confidence. The property, Crescent Music Row, slated to open in 2016, is sure to be successful because of its highly coveted location, says Ben Collins, vice president of the Mid-Atlantic for Crescent’s multifamily group. He says the company has wanted to develop downtown for quite some time but needed the right opportunity and space to build something spectacular.
Crescent Music Row will include 275 units, about 7,500 square feet of retail space, and a professional-quality recording studio and live performance venue with a stage.
“There really was no new multifamily development in downtown Nashville in several decades,” he says. “So, we feel there is a severely untapped demand there. There are rents that really have risen at an extraordinary and unprecedented level.”
Nashville posted a 4.9% gain in rents in 2014, according to Hendricks-Berkadia, with average rents of around $983 per month last year. However, leaders at Crescent aren’t betting on an endless ceiling for rent growth. Eventually, rents will peak, Collins says.
“We continue to be conservative in our underwriting,” Collins says. “We’re looking at meaningfully below what folks are getting today in rents and some of the other communities. We definitely have to have eyes wide open and a pulse on the market, but we’re bullish on Nashville.”
Collins also firmly believes job growth and demand in the city will support extra development. Other leaders echo the same sentiment in other, similar markets, such as Charlotte and various Texas markets.
Graf is also feeling the effects of a trickle-down value proposition, saying the B and C properties managed by Pinnacle have higher occupancies than ever before and better rent growth than the high-class communities.
“As long as the economy remains robust, the job growth is strong, there’s going to be demand for that quality B and C property,” he says.
