Credit Concern
It's no secret that the mad rush to homeownership pulled residents away from apartments at the same time as the shaky economy and lack of new jobs has kept new renters from filling those empty spots. But it has also left apartment firms trying to raise occupancy levels facing another challenge: The people still in the apartment market don't necessarily possess the financial resources of the ones who left.
As a result, Dave Woodward, CEO and managing partner at The Laramar Group in Greenwood Village, Colo., says he's had to revisit credit cut-offs at selected properties. “If you need to capture the same number of residents to maintain occupancy and you haven't lowered your cut points, you won't be able capture that traffic,” Woodward explains. “We haven't done it across the board, but in certain instances we've lowered our scores.”
Others have tried to avoid such a strategy because of the risks it entails. “We haven't changed our qualifications,” says Jared Miller, director of marketing for Lane Properties, an apartment owner in Atlanta. “Even on a property that has a couple of months' free rent, that person has to qualify as if there's not a concession. It certainly hurt occupancy some, but we don't have a delinquency problem at our properties.”
While credit criteria also remain the same at AvalonBay Communities, Dirk Herrman, chief marketing officer for the Alexandria, Va.-based luxury apartment firm, acknowledges that rent reductions and concessions do increase the number of people and the type of tenant who typically can afford to rent an Avalon apartment. “While we have not changed our system of what it takes to qualify for an AvalonBay apartment,” Herrman explains, “what it takes to qualify for a $1,500 apartment is different than what it takes to qualify for a $1,300 apartment.”
Such observations and anecdotes lead Lane's Miller to believe that apartment communities may be evolving as their renter profile changes in response to the appeal of homeownership and the pressures of the economy. “We're seeing that the people who used to lease at the B properties are now trying to lease A properties,” Miller says. “They're moving up one asset class."
National data supports apartment executives' sense that the financial quality of tenants has gone down. There has been “a gradual decline in overall credit scores has occurred over the past 24 months,” says David Carner, a senior vice president for Carrollton, Texas-based RealPage, whose data says renter credit scores hit the bottom last fall, a decline that corresponded with plummeting interest rates. “Just as you would expect, as 30-year fixed rates dropped, credit scores dropped similarly,” says Carner, who speculates that the conversion to homeownership started with people who had higher credit scores and started to trickle down as the single-family market began to solicit prospective buyers “who previously were constrained from homeownership by insignificant income, poor credit, and the inability to raise the appropriate down payment.”
Luckily for the industry, credit trends seem to be improving. RealPage's credit score data showed a significant jump by March 2005.
Of course, there's always room for improvement. “I thought the trough came in the third or fourth quarter of 2004,” says Nevel DeHart, executive vice president for Registry-SafeRent in Rockville, Md. “You could look at national stats and see the trends where you saw some significant shifts downward and then it stabilized. As an overall statement, renter quality has gone up across the United States. But has it gone up dramatically? No.” —Les Shaver
Green Upgrade
New York rehabs 5,000 affordable apartments. Although new apartments frequently incorporate energy-efficient features, it can be costly and difficult to improve older buildings' energy performance. Such an effort becomes even harder when the buildings are located in often-overlooked neighborhoods and home to low-income residents.
But the New York City Department of Housing Preservation and Development and New York State Energy Research and Development Authority want to change that.
The three-phase program, which will be funded by $7 million from the state energy agency, aims to help put energy-efficient lighting, boilers, windows, insulation, refrigerators, ventilators, and energy monitoring systems in 5,000 affordable apartments in the city.
So far, under a pilot program, Bronx-based KDA Realty has upgraded 101 units. “If it works correctly, we are supposed to save $1,000 [annually] per unit in heating and electrical costs,” says Elsie Ortiz, principal of KDA, which will also manage the units. “The tenants will save $200 a year. Once everything is said and done, we hope it helps us with our operating expenses.”
The New York energy agency will provide $3.5 million to cover all of the incremental, energy-related costs in 2,000 apartments in the first phase of the program. In the second phase, the state will spend approximately $2.1 million to cover 80 percent of the costs in 1,500 apartments. In the final phase, it will provide $1.6 million to cover 60 percent of the costs for 1,500 units. —Les Shaver
New Pursuit
UDRT seeks a diverse mix. While most apartment firms are still thinking about how to address changing rental demographics, one forward-thinking REIT is taking action. United Dominion Realty Trust recently created a new senior-level position to address today's increasingly diverse resident base.
“We recognize the power of diversity,” says Chris Genry, the company's executive vice president and CFO. “It makes us more responsive, more aware, and better able to interact well with our customers.”
In February, Moises Vela Jr. joined UDRT as senior vice president of multi-cultural strategy, bringing 20 years of experience as a leader in the Latino community. Vela is responsible for developing specific strategies and programs to attract a diverse resident base.
His first order of business: addressing the Hispanic population, one of the fastest growing groups in the country. UDRT is adding culture-oriented amenities to several of its properties with a high percentage of Hispanic residents. “We are going in and making these properties culturally relevant, culturally respectful, and culturally welcoming,” Vela says. Examples include replacing tennis courts with soccer fields and swapping carpeting for hardwood flooring. Plus, selected new developments will include more open space with picnic tables and grills, instead of the traditional swimming pool.
Vela also wants to diversify the company's workforce, especially among middle- and senior-level management. “This company is committed to ensuring that we look like the people we are trying to serve,” says Vela. He hopes to find talent by partnering with Hispanic and black colleges and associations.
UDRT is one of the first REITs to offer a senior-level position targeted at multicultural diversity, but other multifamily firms may not be too far behind. After all, this type of position is common among Fortune 500 firms and consumer product companies. “It would not surprise me to see more REITS do the same thing down the road,” says Genry. —Rachel Z. Azoff
Natural Décor
Green model units add the finishing touch to a New York rental seeking LEED certifications. At first glance, the model units at The Helena appear to boast the typical high-end furnishings you'd find in any fancy New York apartment building. But a closer look reveals some interesting finds—chairs made of recycled seatbelts, a cocktail table built from the beams of a demolished building, plywood powder-coated bar stools, and baskets composed of recycled magazines.
These recycled, sustainable products are part of an effort to “green” The Helena, a 600-unit rental community in Manhattan. As more developers venture into eco-friendly building, green model units are becoming a valuable marketing tool. “The public absolutely loves the model apartments,” says Bob Scaglion, director of residential marketing at Rose Associates, the property's manager. “They can see there's another alternative to just buying regular furniture.”
The building's developer, The Durst Organization, is seeking gold LEED certification—one of the highest levels of green building commitment offered through the U.S. Green Building Council. But these green model units don't count towards the project's certification—it's just an extra step to help create a green-friendly atmosphere, says Helena Durst, the company's assistant vice president.
But finding earth-friendly furnishings isn't easy, or cheap. The Helena's interior design team spent six months searching for green furnishings and had to rely on a variety of product manufacturers. “Products are not readily available, and it's 20 [percent] to 30 percent more costly” to furnish these units, says Elaine Lewis, president of Elaine Lewis International, the project's interior design firm. But that could change as more developers say yes to recycled seatbelts and milk cartons. —Rachel Z. Azoff
Project of the Month: Loft Living
Gables Augusta, Houston It's hip, urban, loft-style living—but with a softer side. The so-called soft lofts at Gables Augusta in Houston feature 10-foot high ceilings, stained concrete flooring, large glass windows, track lighting, and some exposed duct-work. “We wanted to attract a younger demographic,” explains Ben Pisklak, regional development director for Gables' Houston division.
Built, developed, and managed by Boca Raton, Fla.-based Gables Residential Trust, the 312 one- and two-bedroom unit apartment complex offers a mix of flats and lofts in an appealing location. The four-story, $28 million project, located near The Galleria shopping mall, is close to downtown Houston, entertainment haunts, and other retail stops.
To give the project a cool edge, Houston-based architectural firm Meeks + Partners thought of a simple strategy: Reinforce an open, urban aesthetic feel while maximizing density on a tight 4.25-acre L-shaped infill site. To achieve this look, the architects integrated concrete blocks, stucco, and large-scale vertical elements near the windows.
The property has a density of 73.2 units per acre. But the firm also ensured that all residents could enjoy views of green space and downtown Houston by dividing the development into three groups, each with an outdoor courtyard.
The project, built on a site that formerly housed a Cineplex Odeon theater and a nightclub, proved challenging from a land-planning perspective. A large existing parking garage attached to a neighboring office building dictated the site's L-shape, and the garage's close proximity to the project made it tough to guarantee the city's fire trucks unobstructed access to the commercial property.
The solution? Jon A. Prejean, a principal at Meeks + Partners, says the firm worked closely with the Houston Fire Department to come up with a deal in which fire trucks could access the office building through the apartment's own parking structure.
All the planning paid off. After Gables' grand opening in March 2004, the complex's occupancy level is at 97 percent. —Abby Garcia Telleria
Who's Who Directory Need to know who's who in the multifamily industry? Want to make sure your company makes the list? Visit www.multifamilyexecutive .com today to list your company in the 2006 MULTIFAMILY EXECUTIVE Who's Who Directory, or e-mail [email protected] with questions.
Warning Signs Are Freddie and Fannie too big? Count Alan Greenspan among those who say yes. In recent testimony to Congress, the Federal Reserve Chairman warned that the GSEs create risks for the U.S. financial system as they become bigger. Greenspan wants a regulator who can determine the minimum and risk-based capital standards for the GSEs. —L.S.
Slow Recovery for Kansas City? While many markets around the country are recovering, some apartment owners in the Midwest still have questions about Kansas City. “Kansas City is becoming a concern,” says Steve Hallsey, the CEO of AMLI Residential's management company in Atlanta. “There is some new supply, which is contributing to the problem.” —L.S.
On-site Support Take the guess work out of managing tax-credit properties with RealPage's new software program: OneSite Leasing & Rents Tax Credits. The Web-based solution offers applicant screening, facilities maintenance, accounting, and reporting. Plus, the program ensures that LIHTC rules are enforced when qualifying prospects, recertifing residents, and monitoring program-applicable fractions. —R.Z.A.
Stepping Down Though Bruce Duncan's time at running Equity Residential was fairly short (three years), it will be regarded as fairly successful, says analyst Louis W. Taylor with Deutsche Bank. “His goal was to take the portfolio, make it run more efficiently, and position it to perform over the long term,” Taylor says. “He had a lot on his plate and he accomplished a lot.” Duncan will be replaced by David J. Neithercut in January 2006. —L.S.
Fair Play Sen. Ellie Kinnaird of the North Carolina state legislature is sponsoring a bill to ban landlords in the state from refusing to rent to people who use federal housing vouchers. The bill would amend the state's Fair Housing act, making it illegal to discriminate against someone because of their “lawful source of income.” That covers income from Social Security, supplemental security income, housing assistance, child support and alimony. —R.Z.A.
Watch and Wait for “A” Markets This may not be the time to find A-level multifamily markets, but that could change soon, says Ron Witten, president of Witten Advisors in Dallas. Speaking at NAHB's 2005 spring construction forecast conference, Witten said there were only six “Grade A” markets out there. But by the third quarter of 2007, he thinks that number could jump to about 27. —L.S.
Green Support States are serious about promoting sustainability and smart development through the low-income housing tax credit program, according to a new report from The Enterprise Foundation. “A Greener Plan for Affordable Housing” shows that many states encourage developers to meet some standard of energy and/or water efficiency, use sustainable materials, and ensure proximity to services and amenities. The most progressive states? Kudos go to California, Illinois, and Massachusetts for promoting alternative energy sources such as solar panels and geothermal heating. —R.Z.A.
Name Game Ten thousand Atlantans voted in a contest to name Southeast Capital Partners' latest high-rise condominium. The winning name: The Manhattan. For every vote cast, the developer donated $1 to Children's Healthcare of Atlanta. Plus, one lucky voter won a year's stay in a $300,000 condo. —R.Z.A.
Rich Rents While multifamily owners struggle with flat rents and empty units, there's one group of landlords whose apartment costs are always covered, regardless of whether anyone's actually living in the unit: top executives. According to a May 6 report in the Wall Street Journal, CEOs such as Richard D. Parsons of Time Warner and Michael Eisner of The Walt Disney Co. were reimbursed by their companies for thousands of dollars monthly in 2004 for “renting” their own apartments back to themselves. Companies maintain such arrangements are more cost-effective than having the executives stay in a hotel. —A.R.
Executive Feedback
In the current climate, do the returns you make on value-added properties justify buying these properties?
A: “There are no absolutes. In some markets, deals are priced so high that value-added deals (when all the costs are factored) do not make sense. However, there are other markets where we get paid for the additional risk.” —Greg Fowler, general partner, Fowler Property Acquisitions
A: “Absolutely! Value-added properties are in developed areas that rebound with new job growth fastest. They create a repositioning opportunity to a wider investor interest on reversion, avoid new and higher construction costs and fees, attract the cream of the existing market tenant pool, are able to retain tenants longer, and create a differentiation to old existing condos in amenities and unit upgrades.” —Dave Wedmore, managing partner, Carmel Partners
A: “There should always be tension between return objectives and market behavior. [Western National is] prepared to pay the exorbitant market prices for in-place activity at an apartment community, provided that we can confidently see that a layer of additional capital investments in tenant-paid amenities will result in an acceptable return over a medium to a long-term hold.” —Stephen Duffy, COO, Western National Realty Advisors
Million-Dollar Deal
Post Properties releases details of John Williams' settlement. Almost a year after Post Properties founder John A. Williams lost his second very public fight with the apartment REIT he started, the company released the details of the settlement agreement with the former chairman.
According to Post's 10-K, which was filed in April, Williams will receive $400,000 annually, plus company-paid health benefits and the use of a private aircraft, until 2013. Williams was also released from his noncompete agreement with Atlanta-based Post, which is known for building, owning, and operating luxury apartments primarily in the Southeast.
It's a sweet deal for Williams, says Paul Hodgson of The Corporate Library in Portland, Maine, where he specializes in executive compensation. “I try look at this from the shareholders' point of view to see if they are getting any value,” he explains. “If there's no consultancy, then there's very little justification” for 10-year, multi-million dollar settlement. “It seems somewhat expensive.”
Others say it's worth it. “Certainly there is a cost to this agreement, but the battles with Williams had become such a distraction,” says Craig Leupold, a principal with Green Street Advisors. “This is something that management needed to put behind them ... They're certainly on track to getting where they need to be as an operating company, rather than playing defense.” —Alison Rice