Posts from IBS 2012: part 1

There was certainly a much more positive vibe at this year's IBS Show. Not nearly as vibrant as the recent apartment industry events but much improved year over year. There were still some big names noticeably absent from the exhibit floor but my sense is that the tide has started to turn and we will start to see a more aggressive stance in the second half of 2012. The lack of new supply, improving employment picture and rising rents should accelerate the enthusiasm this Spring.


To quote Tom Toomey,(CEO of UDR) back in early 2011..."apartment developers are going to look back on these times and wonder why they weren't more aggressive..." I think the same can now be said about home builders and vendors in the single family segment. 

There was definitely a buzz about multifamily applications for traditional building products. I was able to snap a few pictures at some of the visits I made this week. Giving the "illusion of custom" is a theme that is going to resonate with Gen Y renters. I expect to see building product manufacturers start to get more aggressive in participating in the growth of multifamily construction as well.


Here are a few interesting ideas for multifamily housing at the builder show: 

Rubbermaid: Closets that can be easily customized and replaced on the turn. This wire shelving is GREENGUARD Certified and can be upgraded to give a "walk-in" feel (not shown). 

Tim O'Connor demonstrates the ease of installation of Sterling's  new line of   Bathtub Showers made of Vikrell. Popular for new construction and renovation in the multifamily space. 

NanaWall shows off its glass wall system that can be installed on balconies.  More functional space and noise reduction in your older product in need of a facelift. 

Building Product Specification Insights

Interviews conducted with industry executives at the MFE Conference 2011. This is a follow-up to a formal research survey we conducted in August 2011 analyzing how building product specification is being conducted in multifamily housing. 


We tackle both renovation and new construction trends.  

Multifamily Property Improvements: Winston-Salem

Since I have been a bit delinquent on my posts I thought I owe readers some "prospecting profiles." Here is the first of a few to come...

Philadelphia firm buys 600 Triad apartments
The Business Journal of the Greater Triad Area - by Lane Harvey Brown The Business Journal Serving the Greater Triad Area - "A Pennsylvania real estate management company has bought Village Resort Apartment Homes for $23.3 million and is marketing the 600-unit complex under a new name, Glendare Park Apartments. PRG Real Estate Management of Philadelphia plans to renovate the 1970s-era complex, said John Goodman, vice president. The complex is in northwest Winston-Salem at 240 Village Crossing Lane."

The PRG Site gives more detail on previous acquisitions (Press Releases):
"The community [The Woods] is in good condition, giving PRG the opportunity to start with cosmetic improvements; a complete color change is already under consideration. PRG’s capital improvement plans also include adding new signage, new vinyl dumpster fences, and installing washer/dryer connections in many of units. During the process, the pool area will receive a complete face- lift. PRG also has significant plans for the landscaping and repairing the pavement, which will spruce up The Woods from the outside.
PRG owns and manages over 7,700 units along the Eastern Seaboard, from Pennsylvania to Florida. The company has added 18 assets to its portfolio within the past five years, and now owns 33 communities throughout the country."

An interesting firm that I was unfamiliar with until now. I like the NOI growth benchmarks they publish in their newsletters (see quote below). I will make you go to their site to see the numbers...tell them I sent you. And then I guess I need to find them another property in NC.

"PRG Versus the REITs - Economic booms come and go, but PRG’s investment strategy based upon what WE do to an asset can weather virtually any storm. When you’re buying below market equilibrium, you can beat the “a rising tide lifts all boats crowd” every time!" - Q4 Newsletter

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

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?

Multifamily Executive Insight: Vendor Selection

Here is additional insight on product specification when it comes to renovations in multifamily housing.

Steve Heimler states the following:
"When looking for the right supplier we look to integrated ordering methods that sync to our construction module software so that data is only entered once from ordering, inventory tracking, to completion and loan draw. The vendors that understand these processes are the same who bring other added value suggestions and products. Ease of communication and technological 'bridges' are vital to reducing human capital expenditures and manual entry errors. Frankly, the product is not as critical as the partner."

If there is anyone who is widely known as an expert on this topic it would be Steve. Prior to selling his portfolio of more than 22,000 managed multifamily units to Riverstone Residential Group he was the founder and CEO of Stratus Real Estate, Inc. He quickly developed a reputation as a reposition specialist in "C" to "B" quality apartments.

Since 2000 he has been responsible for more than $200,000,000 in renovations. As Steve puts it: "We buy a ton of appliances, cabinets, lighting, hardware, flooring, etc."

Steve is a regular at the major industry events (MFE Conference, MFE Leadership Summit, NMHC etc.) and has been an active contributor to Multifamily Executive over the years. With multifamily investment looking solid for the long haul, and the average apartment property being more than 37 years old, it makes sense to get engaged with this industry and get to know folks like Steve.

We wish him all the best with his new company.

Renovation Project

Moving from Atlanta to the suburbs of Houston.

Here is another deal that involves an existing property that investors are looking to reposition. Occupancy rates are rather low at Whispering Winds but the $17MM refi should help fill some empty units and drive rents.

Here are the details courtesy of our friends from HFF:

The Houston office of HFF (Holliday Fenoglio Fowler, L.P.) announced today that it arranged financing and joint venture equity with a total capitalized value of approximately $17 million for Whispering Winds Apartments, a 286-unit multifamily community in suburban Houston.

“The borrower is going to complete a substantial renovation to both the interiors and exterior of Whispering Winds,” added Tucker Knight (HFF). “Given the low vacancy rate in the submarket, the property should attract significant interest post-renovation.”

The new owner of this property is Post Investment Group out of Los Angeles. Sounds like they might be in the market for a few new windows.

Multifamily Renovation & Construction Roundtable

In light of the recent renewed interest in multifamily housing I thought I would re-visit a focus group that we conducted a few years ago in Washington, DC. The editorial staff gathered a group of prominent multifamily owners and developers to learn more about the factors that drive decisions for building products.

Even though the market conditions have changed some since this video was first produced, the insight is still extremely valuable and relevant today.

Click Here for Video



An extensive readership study for Multifamily Executive was also conducted that validates much of the anecdotal information you will see in the video. The fundamentals remain strong, and rents are on the rise in most markets. The key takeaway is that product decisions are made by different people and for unique reasons in this market. Having a better understanding of these factors can open up a new growth market for your firm.

Multifamily Conversion & Capital Improvements

My last post featured 2 small renovation projects. This morning I received a press release from my friends at HFF featuring a conversion project in Newark, NJ that required quite a bit more capital expenditure.

FLORHAM PARK, NJ – The New Jersey office of HFF (Holliday Fenoglio Fowler, L.P.) has secured $65 million in financing for Eleven 80, a former office building that has been converted into 317 residential units in Newark, New Jersey. Working exclusively on behalf of Cogswell Realty Group, HFF senior managing director Jon Mikula and managing director Jim Cadranell placed a long-term, fixed-rate loan with Bear Stearns Commercial Mortgage, Inc. The financing, which will be serviced by HFF, will retire existing debt used to renovate and convert the property into a luxury residential tower. Originally built in 1930, Eleven 80 recently underwent an extensive gut renovation turning the long vacant office building into a state-of-the-art luxury apartment building. Community amenities include a bowling alley, half-court indoor basketball, spa, fitness club, and valet parking and doorman service.

Both Multifamily Executive and Apartment Finance Today cover deals like this one regularly. If you are a service provider, there are some interesting opportunities that can easily be overlooked if you don't read past the headline announcing the transaction. Most interesting: this isn't the first deal of its kind for CRG.

Case Study: Lighting & Window Replacement

If you are a product manufacturer it might be useful to investigate the local incentive programs that are being offered to multifamily developers and owners. Oregon is certainly one of the more progressive-minded states when it comes to encouraging high performance building but the case studies offered here can be a lesson to any building product manufacturer looking to understand what drives product decisions in multifamily housing. Lighting, windows, doors, HVAC, insulation, washers and dryers seem to be the primary targets for practical "green" renovation and construction.

Let owners and developers know what your product can mean to their NOI and how to market the green benefits to residents.
"Energy Upgrades Give Properties a Marketing Edge"
"Energy Efficiency Makes Tenants Comfortable"

Click through the links above to see the programs offered by Energy Trust of Oregon, Inc. These are 2 small projects that realized a big financial upside for owners and tenants alike.

Multifamily Market Trends

The past week has been spent pouring over data from Harvard's Joint Center for Housing Studies, NMHC, PPR, US Census Bureau, NCREIF and many others. With the housing market in a state of chaos I was hoping to find more detailed market data that indicates where the rental market might be headed. Here are some of the notable statistics:

* Only rental markets and remodeling activity expanded in 2006. Improvement spending set a record for the 5th consecutive year. (State of the Nation's Housing 2007)

*Demand for affordable rental housing is not being met; 200,000 units are being removed from the rental stock annually (State of the Nation's Housing 2007). When you combine this stat with the fact that the median age of the country's rental stock is 37 (US Census) supply numbers look rather healthy.

* Strong property valuations have continued to encourage property owners to reinvest in properties. At last check Harvard's JCHS put this spending level number at $50 billion+ for rentals alone. Investment grade apartment prices increased 8.4% year over year in Q1 2007 according to NCREIF.

* Household growth is expected to accelerate to 14.6MM from 2005 to 2015 due to immigration, echo boomers entering the pool and the extended longevity of the baby boomers (State of the Nation's Housing 2007). Most anticipate that rentals will benefit most from this trend going forward.

There is no clear indicator that multifamily rental starts will replace the activity in the condo market this year but anecdotally the major players all seem rather bullish on where things are headed. Here are some quotes from the May Issue of MFE that are much more telling than the macro views and demographic analyses.

Campo on demand:
Just look at these numbers: At the peak of the for-sale boom in the beginning of '05, about 24 percent of Camden Property Trust's residents moved out to purchase homes. But in the last quarter of '06, only 19 percent left to buy a home. “That's a big drop,” says Ric Campo, chairman and CEO of Houston-based Camden. “We have 70,000 units roughly, so that's 3,500 fewer leases that we have to replace annually.”

Tuomi on land costs:
“Land is much more competitive now for apartment developers, whereas a few years ago it was out of sight,” says Fred Tuomi, executive vice president and president of property management for Chicago-based Equity Residential. “We would bid a certain price, and a condo or for-sale user for that land could bid double or sometimes up to the three times as much. At least we now have an opportunity to compete acquire these sites, whereas the last 24 months a lot of sites just weren't even possible.”

Linneman on opportunity:
“In early 2006, the opportunity was to sell your land that you bought six months earlier at a big profit to someone who was going to be a big condo developer or to sell your apartments at a 3 [percent] cap [rate] to some-who was going to be a converter,” says Peter Linneman, Albert Sussman professor of real estate at the University of Pennsylvania's Wharton School. “The opportunity in late '07 is going to be buying back your apartments from the failed conversion or buying back your land because the guy never got the deal off the ground, and you'll buy it back at a discount to what you sold it at.”

Leupold on the shadow market:
“Condo reversions is a topic on most investors' minds, but we believe the issue has been over-hyped,” says Craig Leupold, principal of Green Street Advisors, a Newport Beach, Calif.-based consulting and research firm. “There may be pockets of weakness in certain submarkets that experience a large number of reversions, but overall we expect reversions to have little impact on the U.S. apartment market.”

The bottom line: it is easy to get caught up in national statistics that mask dangers or opportunities in specific markets. I attended the Builder 100 conference several weeks back and was amazed at how optimistic many of the speakers were about their business in light of such negative headlines. The speakers that were most bullish had a specific strategy to take advantage of the changing dynamics in their market.

Here is how some of multifamily's strongest firms handle the uncertainty:

Harrelson's Strategy:
To compensate for pricing pressure and cap rate compression, Pinnacle increased ownership in the affordable and military housing areas. Harrelson says his company amassed nearly 20,000 units of military housing and increased its low-income and tax-credit portfolios as well.

Ward's Strategy?
“The baby and echo-boomers are really going to be driving multifamily in general,” Alliance Residential President Bruce Ward predicts. “What seems to be happening is that both demographics are looking to be in more high-density urban housing.”

Micheals Strategy:
Michaels Development of Marlton, N.J., also moved up on the list through a strategy of capitalizing on niche markets such as military and affordable housing. “We find that the demand for affordable, workforce housing is just incredible and getting bigger and bigger every year,” says Michaels Development President Bob Greer, who credits that demand for the company's surge in management business.

The case studies are much more interesting than the stats. Check out the May Issue for more.