B2B Trends Study

The Institute for the Study of Business Markets (ISBM) at Penn State has an ongoing project to study trends in the B2B environment. The respondents (~400 total) to this particular study include academic thought leaders and ISBM practitioner members.

"Often the community of marketers inside a business-to-business firm is nowhere near as large as the community of marketers in a consumer packaged-goods culture. The chance to share and learn from other perspectives, other experiences, and peer networks is very important to business-to-business marketers, and an active part of the ISBM agenda."

Two of the anecdotal findings stood out:
#1 Develop approaches and methods to better understand what CUSTOMERS REALLY NEED, beyond what they can say or articulate. Opportunities to CREATE REAL VALUE…

** How many times have we (in a selling role) "listened" to customer feedback, come back with a well-prepared solution, only to have the customer take a pass on our "great idea".

#7 SELLING THE C-SUITE: developing the case for the value and impact of marketing that is understood and embraced by top management…Connecting with the “C-Suite” in terms they care about – growth, profit, and return on investment, all cited as very critical – and exceptionally difficult in business-to-business markets.

** Many of us has been here as well. The classic disconnect between Senior Management and Marketing or what I tend to see more often in our industry, the disconnect between sales and marketing.

By the way, another important research document can be found on their website which furthers the support of marketing during a recession.

Research: Companies Strong In Marketing Should Increase Efforts During Recession
"The paper finds that firms entering into a recession with a pre-established strategic emphasis on marketing; an entrepreneurial culture; and a sufficient reserve of under-utilized workers, cash, and spare production capacity are best positioned to approach recessions as opportunities to strengthen their competitive advantage.

Comparing these businesses to the best-trained athletes, the authors write that "athletes often choose times of stress to mount attacks: strong runners and bicycle racers may increase their pace on hills or under other challenging conditions" to beat out weaker opponents during the most difficult leg of their race."

As a cyclist I can identify with this comparison and never thought of the business connection until now. The strongest riders in a bicycle race want the race to be as hard as possible. When the race is easy it is much harder to distance yourself from the competition. The current economic environment certainly makes the race hard. Now is the time to put the attack in.

Glossary of Lending Terms

Here is a list of some "basic" lending terms from the AFT Conference. Don't be afraid to ask questions that may seem basic, chances are that at least 50% of the folks in the room have the same one.

Capital Markets 101, Apartment Finance Today Conference, April 8, 2008

All-in Rate: The interest rate charged to borrowers on a given loan. The all-in rate includes both the benchmark rate used to set the loan, such as the 10-year Treasury rate, and the spread charged by the lender. So, a 10-year Treasury rate of 3.5 percent plus a spread of 200 basis points (or 2 percent) would equal an all-in rate of 5.5 percent.

Amortization: The way that debt is reduced by installments over a given period of time. Amortization is the calculation of equal monthly payments that pay off the debt and interest charged on a loan. It is expressed in years: a loan with a 30-year amortization would have 360 payments.

Debt Service Coverage Ratio (DSCR): DSCR is an underwriting formula that measures whether an income-producing property can sustain its debt based on cash flow. The calculation is Net Operating Income/Total Debt Service. For lenders, the higher the DSCR, the less risk it is taking on the loan. Freddie Mac and Fannie Mae lenders typically underwrite to a 1.20 DSCR, meaning that for every dollar spent on debt payments, the property generates $1.20.

Government-sponsored Enterprises (GSEs): GSEs are financial institutions that were created by the U.S. Congress to provide liquidity in a given market segment. Fannie Mae, Freddie Mac, and the Federal Home Loan Banks are GSEs. While these institutions have a public charter, they are privately owned.

Loan to Value (LTV): An underwriting calculation that measures the amount of a loan against the property’s appraised value. A borrower seeking a $1 million loan for a property worth $2 million will have an LTV of 50 percent, for instance.

Mezzanine Financing: A form of capital that fills the gap between a first mortgage and equity to achieve 100 percent financing on a deal. Mezzanine financing can be structured to emphasize debt or equity characteristics—it can work like a standard loan or allow the mezzanine provider to share in profits.

Non-Recourse Debt: A type of debt wherein the borrower does not have personal liability for the loan. Non-recourse debt is secured by collateral, usually in the form of property. If the borrower defaults, the lender can seize the collateral, but can’t seek further compensation, regardless of whether that collateral covers the full value of the defaulted amount.

Senior Debt: A form of debt that has priority over other types of debt in a given deal. If a borrower defaults, the senior debt must be repaid before other creditors receive payment.

Spread: The amount charged by a lender for issuing a loan. The spread is one component of the all-in interest rate. The spread is expressed in basis points: 100 basis points equals 1 percent.

Subordinate Debt: A form of debt that ranks below other loans in a given deal. If a borrower defaults, subordinate debt providers would get paid only after the senior debt is paid off in full.

Multifamily Market Buzz: New Construction Trend?

Here is more anecdotal evidence of strong renter demand and rising rents in the urban core. Today's edition of USA Today.

Renters can't escape housing foreclosure crisis, By Stephanie Armour, USA TODAY

"The health of the rental market is critical for several reasons. Rising demand for rentals can spur construction of apartment buildings, a trend that's already occurring in some metro markets. And the need for more rental properties can energize urban development, because higher commuting costs have translated into growing demand for rentals that are near urban employment centers rather than in outlying suburbs."

Another key takeaway: The shadow market is overly hyped in most markets. Banks do not want to be landlords. And renters are going to be cautious of renting in homes where they might soon be displaced.

Don't miss the boat on renovation and construction opportunities. The ability to raise rents drives both of these trends.

Want to learn more on this urban living trend? Check out the latest issue of MFE and the article entitled Class Dismissed along with the cover story, The Transformer featuring Kevin McGowan of Blue Urban.

Multifamily Market Buzz: Seattle

Here is market enthusiasm that is supported by solid anecdotal evidence. This approach is much preferred in my opinion.

The April 20th edition of the Seattle P-I.
Rent at an all-time high -- if you can find a place

Key quotes:
A new report affirms that apartments are about as hard to find now as they have been any time in the past three decades and rents are on the rise.

"As far as tenant demand, we haven't seen that huge increase that we thought we would have, given the slowdown in the sales market," he (Dean Foggitt, a broker at Brink Property Management) said. "What we've seen more is people staying put, less tenants giving notice."

Traffic and high gas prices have driven up the desirability of areas closer to people's jobs, he said. "As you get further out, the responses drop dramatically."

Multifamily Market Buzz

The business press (Wall Street Journal, New York Times, etc) has certainly been generating more content buzz on the multifamily industry these days. Most of these articles lead with a positive headline and then spend 300 words hedging against the bold outlook that brought you in. Analysts try to reconcile REIT earnings reports with market trends, economists flip-flop on the impact of the shadow market and job growth uncertainties are always tossed in to leave you more confused then when you started.

If you are a service provider it is hard to use any of these findings to chart a course. When speaking with firms looking to enter the market (and there are many these days due to the bold headlines) I always try to caution against following these broad strokes and look at the day to day business of owners, operators and developers.

Core market fundamentals haven't changed much since we were bumping up against a 70% homeownership rate in 2005. I would assert that this is the most attractive attribute of multifamily housing: steady growth and sound fundamentals.

New construction will always be somewhat constrained, renovation will be a steady and growing activity, fragmentation of the market allows for huge operational efficiency spreads and investors will continue to view this market as a relatively stable performer. We read about the REITs daily but they control a small percentage of the market activity whether the news is good or bad.

So I encourage providers to come and consider the market opportunity, but remember that multifamily is not the new, new thing. There is no easy money and showing up doesn't deliver the payoff. There is plenty of room for providers committed to understanding and serving the market for the long haul.

Enough of my opinions, here is a viewpoint from the former editor of MFE, Alison Rice. She still does project work for Hanley Wood and represents clients in the multifamily industry. She sends me many of these headlines and I asked for her take on them.

Q: What do you make of all the multifamily housing headlines in the business press?
AR: Because no one can write about foreclosures and the subprime situation all the time. Plus, the crash in the single-family market has reminded people that renting is a perfectly acceptable and, in some cases, financially wiser, choice than homeownership, especially if buying that house requires overextending oneself financially and agreeing to a too-good-to-be-true mortgage that you don’t really understand. At the same time, there have been some big changes among top multifamily players (i.e., Archstone merging with Tishman and UDR moving upscale) that could affect both the composition and the priorities of the industry, so real estate reporters are watching to see what happens.

Q: Are current clients, and other industry players, truly spending more energy on refining operations these days?
AR: I think they have to, because the shadow market of condo and single-family home rentals has proved much larger than anyone expected. Apartment firms truly need to live up to the expectations they set with their residents, because renters today have their pick of living situations.

Q: Where do you see opportunities for service providers under current conditions?
AR: This is a sad observation to make, but given the volume of foreclosures, I see business opportunity for apartment firms and vendors who can serve families looking for a rental apartment, either because they lost their own home or their landlord lost the house that they rented. I see other opportunities in the broken condo arena, where apartment companies are getting deals on failed condos and reverting them to rentals. These deals are complicated and always vary from property to property, so I would think a service provider who could streamline any or all of the process for their multifamily clients (perhaps by finishing a renovation, communicating with individual unit owners, or re-educating the market about this again-rental property) would offer value.

Other thoughts out there?

Affordable Housing Developer of the Day

Another market segment with strong fundamentals that has hit a strong headwind is affordable housing. The shortage of tax credit equity has put many deals in jeopardy. There are some success stories out there and the local agencies seem to be trying to step up to plug the gaps.

The Sacramento Business Journal profiled a local developer who is having a record year amongst the turmoil, St Anton Partners LLC. "The company has a portfolio of more than 4,000 units spread across almost 30 projects in the capital region. With 200 employees, it's one of the area's larger developers..."

The article goes on to point out:

One reason it's larger than the typical developer is that St. Anton handles financing in-house rather than through consultants and acts as its own general contractor and property manager. The latter is a key component that has redevelopment agencies singing its praises.

The good news is that more people finally realize we have a problem in delivering product to this market. Demand will continue to outpace supply for years to come. One would hope that sustainable legislation (not a bailout) to stimulate this vital sector will be fast-tracked. I am certainly more confident in the creativity of the active participants in this business than the government's ability to act quickly this year, so I will keep an eye out for more success stories like St. Anton.

A convenient truth about marketing

Full disclosure: this post is not a public service announcement or political statement. It is simply another observation about marketing & advertising to add to the collection.

A marketing newsletter I received today (MarketingProfs) pointed out the power of Al Gore's advocacy campaign on climate change. Regardless of your political leanings you have to give credit to Al for making the most of every opportunity to talk about his passion. He has mastered the art of PR.

The former democratic presidential candidate was quoted in a recent Washington Post article as saying:

"This climate crisis is so interwoven with habits and patterns that are so entrenched, the elected officials in both parties are going to be timid about enacting the bold changes that are needed until there is a change in the public's sense of urgency in addressing this crisis," Gore said. "I've tried everything else I know to try. The way to solve this crisis is to change the way the public thinks about it."

And how does he plan on doing that? Gore is launching a 3 year, $300 million campaign aimed at mobilizing Americans. This campaign will include investments in magazine display ads, TV Commercials and social networks online. Gore certainly has brand awareness as a politician. He has won an Academy Award for his movie and the 2007 Nobel Peace Prize. This notoriety offers him virtually unlimited access to the news media. However, it is important to note that this incredible opportunity for exposure is still limited. It does not allow his campaign to utilize powerful imagery, establish emotional connections and most importantly, target a message to different audiences to maximize impact.

Cathy Zoi, the Alliance for Climate Protection's chief executive, said the group will focus on individuals known in the advertising world as "influencers" who talk to a disproportionate number of people in their communities. While some ads will target inside-the-Beltway policymakers, the bulk of their efforts will focus on the general public.

Al isn't the only believer in advertising. The Washington Post goes on to report: "Americans for Balanced Energy Choices, a nonprofit funded by the coal industry and its allies, is spending about $35 million this election to bolster support for coal-generated electricity.*"

There are a few takeaways from these announcements that might be helpful to advertisers and non-advertisers alike.

* By Juliet Eilperin, Monday, March 31, 2008; Page A04 , Washington Post Staff Writer

Forecast for Rental Housing Demand 2008

Linwood Thompson from Marcus & Millichap's National Multi Housing Group put on another enlightening presentation that took attendees on a walk through of where the industry has been, the current state of the market for investors and where the current economic environment may lead us. This took place on Day 3 of the Apartment Finance Today Conference.

Here are some of the key takeaways from my perspective:

• Although transaction volume has suffered due to the capital markets fallout, the negative rhetoric in the press (lumping multifamily with other assets) is a misleading assessment of our marketplace right now.
  
• The key components of solid fundamentals that will drive multifamily success: Delinquency rates are still less than 1% in multifamily, demographics and immigration trends are extremely compelling going forward and the lack of new supply over the past 10 years keeps rent growth on a solid foundation.
  
• Many overlook the fact that investors are getting high yields on distressed paper right now. Once that opportunity is gone they will return to traditional deals and multifamily will be a core asset class for investment.

Shoot me a note if you are interested in getting a copy of Linwood's presentation. He covers the topic in great depth and provides solid sources for his findings. You can also view a previous post for his first 2008 forecast back in October. Many of the fundamentals he outlined then remain unchanged.

Maximize NOI

Day 2 of the Apartment Finance Today Conference covered some interesting NOI Building ideas. Since deal velocity has slowed considerably it's time to get back to basics and maximize efficiencies. Lee Harris (Cohen-Esrey), Richard Kelly (LumaCorp), Dave Richitelli (ista North America) and Jeff Kelly (Tucson Realty & Trust) spent some time digging into the multitude of ideas out there that WILL increase NOI if we take the time to get educated.

Some of the topics:

• Credit Cards - reduce bad debt and attract renters
• Revenue Management - manage expirations and realize quick payback
• Green ideas that save money - Lighting, monitoring gas boilers, irrigation efficiencies and submetering
• Trash removal, Low Cost Physical Improvements and Surety Bonds

Focusing on customer service needs to be a core competency of apartment operators. Those with a sound strategy will whether any storm. Especially those caused by speculators who were in the business for a quick hit. This customer service theme was also emphasized in the Keynote by Dr. Tony Downs from the Brookings Institution.

The discussion that took place was lively and participants were enthusiastic about making investments in products and services that offered immediate ROI.

Multifamily looks for long ideas

Day one of the Apartment Finance Today Conference exceeded expectations for me. I anticipated a mixed-bag of murky, market forecasts but overall I found the group to be extremely optimistic and aggressively in search of market opportunities.

AFT attendees feel that we are not out of the woods on the national economy, and don't have confidence in our government's ability to help the matter, but I certainly got the sense that owners and developers have a confident mindset. "Access to capital is challenging, cap rates remain low and more product is on the market now, but we could have big positions in office, industrial or retail right now and be far worse off."

"NOI is slowing but still growing in many markets, GSEs (Fannie and Freddie) are supporting the market's capital needs in a big way, foreign and institutional money has not been frightened off and even 'well-documented' horror stories by the mainstream media, like Phoenix, still have strong fundamentals and growth upside for savvy long term investors."

Make no mistake, not all was cheerful and rosy. Pressing issues like the lack of tax credit investment, job growth and the bulge of multifamily CMBS refinancing needing attention in the next few years were touched on as significant challenges that can create an even more hostile environment for business.

Obviously the folks who attend industry conferences and share best practices with peers are doing the necessary homework to be successful...so maybe I should expect this type of positive inspiration here. Nevertheless it was exciting to watch this very open and engaging dialogue take place. More tomorrow...

Multifamily is Green: Part 2

Rather than answer my own post I will provide a follow-up. Alameda County has a great website called stopwaste.org. Under this site is a wealth of information on Green Building and more specifically, a set of Multifamily Green Building Guidelines.

I wish I could say that this is breaking news but it was published back in 2004 and I managed to remain in the dark about it for awhile now.

There are interesting case studies that support the guidelines as well. My advice applies to myself first and foremost...we all need to dig deeper.

Multifamily Housing is Green

Each side of the housing market (single family vs. multifamily) has its own set of powerful propaganda that can really motivate change. I happen to be a renter because it is less expensive in the Bay Area (for the moment) and it allows for a lifestyle flexibility that I enjoy. Even though I have a vested interest in multifamily housing, I still think that making a generalization about one or the other is like pulling the party line lever in the voting booth...even though many of us do it, the practice is irresponsible.

One sales pitch that I haven't seen enough of in practice is the case for multifamily housing being Green...right now. By its nature rental housing encourages conservation. Location, higher density, smaller living spaces are just a few factors that make multifamily the green choice without even trying. This story has merit and can generate traction with customers if we position it properly. We don't need to be certified to state the facts to customers, the press and local governments.

Owners want to conserve energy for profit, renters feel the pinch of energy costs but as a whole neither takes the time to add up where their money goes and put together strategies to change. Let's talk more about how being green is fiscally responsible and give examples.

Here is an interesting program from our friends at Mark-Taylor.

Go Green, Save Cash on Gas Mark Taylor offers $1,000 rent savings to new residents who cut their commutes by moving to a Mark-Taylor property
Scottsdale, April 2, 2008—Phoenix apartment renters tired of paying $3-plus per gallon for gas and spending way too much time stuck in traffic can now save time, money and the environment with Mark-Taylor Residential.
This month, new residents who prove they will cut their commutes by moving to a Mark-Taylor property can receive a $1,000 savings on their rent.
www.mark-taylor.com/spring08.htm