Market Smarts

At a time when occupancy has softened and rents have stagnated or dropped in most U.S. markets, apartment owners and managers are struggling to push every penny to the bottom line.

A few companies are benefiting from operations in metros where overall conditions have remained comparatively healthy, but the list of cities with still essentially full occupancy and rising rents is short. Strategic submarket positioning helps as does product niche concentration, though no company can offer the ideal product in the ideal location across an entire portfolio of communities. Looking beyond these market trends, individual company management and marketing skills are perhaps playing an underappreciated role in balance sheet tallies.

M/PF Research's quarterly survey of nearly 4 million apartment units across the United States shows large differences in occupancy and rent achievement for projects of similar age and quality within many neighborhoods. These are differences that can't be explained away by significant variation in property characteristics or location. And the fact that management companies achieving the strongest performances in one neighborhood often are writing similar success stories in other locations helps to emphasize the importance of management and marketing expertise.

Providing a snapshot of life in the leasing trenches across the country are the largest management companies active in Atlanta, one of the toughest markets to operate in at this point; Houston, where overall conditions are fairly similar to trends seen for the country as a whole; and San Diego, which ranks among the markets where occupancy and rent achievement are strongest nationwide.

Almost without exception, this analysis of performance by individual companies reveals that the apartment industry real estate investment trusts (REIT) tend to have notable management skills. In these three cities, REIT properties typically generate overall revenue – considering both occupancy and effective rent production – that is at least in line with the levels achieved by age-comparable, privately-owned projects in the same neighborhoods.

In most cases, REIT communities command slight revenue premiums, and in several instances, the REIT projects can charge significant revenue premiums. Because they are required to answer to investors and analysts every quarter, the REITs are clearly plugged into trends down to the neighborhood level and, for the most part, appear to be maximizing performance potential.

The analysis also suggests a home court advantage. A company tends to rank among the best performers in its home town, usually because a comparatively large share of the company's portfolio is located in that city. Plus, more attention is likely to be directed to the management and marketing efforts in the metro responsible for a big chunk of the company's revenue.

Probably no market presents management companies with more challenges than Atlanta. Its occupancy rate lingers among the lowest nationwide, effective rents are still headed downward, and additional product continues to pour into the marketplace. In this sort of environment, there is very little wiggle room on rents. Most of the best overall performers have effective rents that surpass the rates at their competitors by only the slimmest of margins, and some of the top revenue producers actually report rent positioning a little below the market norm. To achieve an overall performance premium in Atlanta, above-average occupancy is necessary.

Most of the REITs operating in Atlanta – and they are nearly all there on some basis – are commanding revenue premiums around 2 percent to 3 percent over the results for direct competitors in the marketplace. The group of companies with moderately above-average performances includes Post Properties, Atlanta's biggest player, though achievement varies notably within different segments of the company's portfolio.

Each year, Post Properties surveys every resident, including those at Post Gardens in the Lenox Park section of Atlanta, about satisfaction. Customer satisfaction is at a three-year high.Steve Hinds

Post is struggling to gain momentum with its newer urban core developments that stretch the affordability reach of some renter prospects. "It's an intensely competitive leasing environment at the high price points in and around the Midtown and Buckhead markets, reflecting an abundance of top-end rental units as well as numerous condominium options," say Tom Wilkes, president of Post's management group.

In contrast, the company is doing better with its suburban projects, most which were built during the 1980s. These projects are sustaining significant occupancy advantages and slight rent premiums over direct competitors.

According to Wilkes, it is Post's quality product and service that draws renter prospects to its projects. To keep the company focused on meeting customer needs, it has been conducting resident satisfaction surveys for more than a decade. Every resident is contacted at least once during the course of a year. "We're proud to say that overall customer satisfaction scores are now at a three-year high," Wilkes reports.

Satisfied residents have allowed Post to cut its turnover rate in Atlanta during the past year, despite the fact that the metro's home sales volume was the highest nationwide. "We've also seen that some of the residents we lost to competitors that offered bigger rent concessions a year ago actually have come back to Post communities when their leases came up for renewal," he adds.

Post also has tweaked employee recognition programs in order to reward personnel doing a good job in an environment that presents greater challenges. The company's "Moving On Up Club" acknowledges property performance improvements measured on a month-over-month basis. "In the past, we've placed more emphasis on year-over-year results, but today's conditions make it important to track movement toward recovery in smaller steps," Wilkes says.

While it's difficult to gain a notable edge in Atlanta, one company has done just that. roperties managed by Gables Residential Property Trust generate revenue premiums on average near 6 percent over the typical incomes produced by key competitors, with the bulk of this advantage resulting from higher occupancy. Among nearly two dozen Gables-managed projects examined for this analysis, only three had occupancy rates below the average for direct competitors – and one of those was a new development still in the initial leasing stage.

The company began efforts to brand customer service four years ago, says Marvin Banks, CFO at Gables. He believes the company's new service-oriented mission, "Taking Care of the Way People Live," is paying off now that the marketplace has grown more competitive.

Gables' strategy in Atlanta, where Gables Paces is located, is to brand customer service. The company's mission is "Taking Care of the Way People Live."

Another area that is sometimes overlooked when discussing customer service goals is technology. The company invested $6 million in a Web-based information system, which was rolled out in 2001 and early 2002, that provides real-time data on the performance of the Gables portfolio. This system allows the company to adjust pricing daily, while decreasing the amount of time that on-site employees spend on administrative duties and paperwork.

"The improved technology gives our people the tools to make good decisions," Banks says. "They now have more time to spend with customers, and they do. Training our maintenance staff to remain on top of customer service initiatives also has been important, because they are on the front line dealing with customer issues," he adds.

The company also takes advantage of economies of scale by focusing operations in what they call established premium neighborhoods – concentrating development and ownership in a desirable area rather than spreading properties throughout a metro area. "We believe that marketing one-off assets underutilizes our strengths," Banks states.

He further cites corporate culture as a significant influence on the bottom line. "Gables wants to be the employer of choice for the best apartment personnel in the market," Banks says, "and our six-week paid sabbatical every five years for an associate with more than 10 years of service sets us apart."

Houston is where it really starts to get interesting. Neither in the dire shape like Atlanta nor robust like San Diego, Houston leaves plenty of room for different operating strategies. The list of top performers is diverse and expands beyond the big national companies to include some regional firms.

Equity Residential is producing the largest performance premium generated by any company in the markets examined. Their properties generate revenue more than 8 percent over the norm for direct competitors in Houston. In a few cases, an occupancy advantage registers, but for the most part the revenue premium stems from maximizing rent production.

Similarly, above-average rents play the biggest role in a revenue premium of around 6 percent for United Dominion Realty Trust. A mix of occupancy premiums at some projects and rent premiums at others leads to overall revenue advantages just under 8 percent for Alliance Residential and near 4 percent for Orion Real Estate Services.

Another top performer in Houston is Camden. Success at Camden's suburban developments is allowing the company's Houston portfolio to generate overall revenues more than 4 percent over the performances seen for age-comparable projects in the same neighborhoods. In contrast, no revenue premiums occur among the firm's class A projects in Houston's urban core, where large numbers of new units were added to the market and have resulted in intensely competitive leasing conditions.

The right pricing is a key component of Camden's operating strategy. While the company is still in the early stages of implementing an automated pricing model across its portfolio, an early pilot program revealed key guidelines that are being followed at multiple locations. "We're avoiding any across-the-board concessions or move-in specials so that discounts are limited just to the units in weaker demand segments," says Dawn Gaudet, Camden's district manager for Houston. "Also, we pay close attention to lease expiration dates and try to schedule them at times we know will be periods of heavier renter traffic."

Camden is quantifying performance using its 20/40/5 Plan, which has been implemented at all its properties, including Camden Holly Springs in Houston. The plan tracks traffic, new leases, and vacancy rates.

Helping Camden quantify its performance, the company has introduced a program called the 20/40/5 Plan. The program aims at generating monthly renter traffic that equals 20 percent of a property's total unit count and converting 40 percent of those prospects into residents in order to achieve a 5 percent vacancy rate. "While this doesn't necessarily change the way we operate, just putting numbers to the plan keeps everyone focused on the same goal," Gaudet reports. "Plus, situations that require action are revealed."

Among other top performers in Houston, Walden maintains slightly above-average rent production and slightly above-average occupancy for nearly every one of its 28 Houston area projects studied, attaining the most consistent positioning seen from one property to another among all the portfolios examined. The company's total revenue premium over key competitors climbs to just above 7 percent.

Where the firm employs an aggressive revenue pricing plan, Steve Lamberti, Walden's executive vice president, attributes some of this revenue advantage to property characteristics – the firm recently invested significant capital on both exterior and interior improvements for projects that are now about 20 years old. Furthermore, almost all of Walden's communities benefit from locations along major thoroughfares, Lamberti says.

Walden's biggest asset in Houston is the seasoned staff that the company has in place, according to Lamberti. "It is a tenured management group as well as an experienced team of on-site personnel," he says. "There's a cohesiveness and rhythm that develops when you're lucky enough to have people who have worked together for a long time. It makes the decision process easier."

An established routine for Walden's staff in Houston has not prevented the company from adding innovations to the way the firm does business. The evolution of business practices includes an increasing emphasis on the market's rapidly growing Hispanic renter audience. Targeting the needs of this group, Walden now is developing after-school tutoring programs at select communities, and the company is advertising in local Spanish-language publications.

With individual investors controlling a much larger share of the apartment stock in San Diego than in Atlanta or Houston, relatively few companies have sizable portfolios to demonstrate successes that clearly can be attributed to management and marketing skills. Within the group, the two best performers are Archstone-Smith and BRE Properties. These companies each own or manage some 3,200 units to 3,500 units that on average earn revenues roughly 7 percent over the norm for projects of similar age in the same neighborhoods.

Archstone-Smith has been among the first companies in the apartment industry to put yield management software into widespread use, having deployed a Web-enabled pricing system across all of its garden apartment communities during 2001 and early 2002. This tool has raised the bar for performance across the company, allowing instantaneous price adjustments based on shifts in demand and product availability, says Dana Hamilton, Archstone-Smith's executive vice president for national operations.

Archstone-Smith is one of the first multifamily firms to use yield management software across its portfolio, raising the performance bar for the company. Above is Archstone Escondido, a luxury community in Escondido, Calif.

Furthermore, the system is forward-looking. It can anticipate conditions at various lease expiration times. "Sometimes you have to buy future occupancy to make sure that you won't have too many units available at times when renter traffic is sluggish," she explains.

While pricing is significant, Hamilton says that staffing has just as much impact on overall performance. "People will always be incredibly important in the industry," she says. "You have to recruit the right personnel, provide them sufficient training, and create the type of workplace that leads to employee retention."

Frank McDowell, president and CEO at BRE Properties, partially credits premium performances that the company now registers in San Diego and several other metros nationwide to some hard lessons the company learned operating in the San Francisco Bay area's roller-coaster market during the past few years.

"We make sure to maximize the results available from our talented personnel by placing the best people at the properties that make the biggest contributions to net operating income," McDowell reports. "Also, we make sure our product is offered at a fair price without concessions. We've found that prospects looking for big upfront giveaways often are focused on price for a reason. Leasing to that group leads to higher turnover."

BRE looks for where revenue can be boosted significantly by spending a little more money. Enhancing curb appeal – especially in a softening market where efforts to limit costs mean that some owners are not staying on top of property appearance – is one way an increased expenditure can end up yielding more dollars in the long run, says McDowell.

BRE Properties maximizes results by placing its best people at the properties that make the biggest contributions to net operating occupancy income. Above is the company's Pinnacle at Carmel Creek in San Diego.

"It's all about people and pricing," says Archstone-Smith's Hamilton, neatly summing up the opinions voiced at today's top performing management companies.

These companies have in place well defined programs to promote customer service, measure resident satisfaction, encourage employee performance, and maximize rent achievement. Thus, their revenues exceed the market norm, whether operating in the best of times or the worst.

–Greg Willett is the vice president of research products at M/PF Research in Dallas.

Today's housing market seems to be suffering from a split personality. While residential real estate continues to be a pillar for the U.S. economy, a sad dichotomy finds more and more of America's working families experiencing a critical housing need – defined as paying more than half of the household income for housing and/or living in substandard conditions.

Yes, housing production is up, with 1.6 million housing units, including 320,000 multifamily units, predicted to be built this year, according to the National Association of Home Builders. However, the gap in housing affordability for low- and moderate-income households continues to widen. In 2001, 4.8 million working families faced critical housing needs, a 60 percent increase in just four years, according to the November 2002 Center for Housing Policy/National Housing Conference report "America's Working Families and the Housing Landscape."

Nationwide, full-time workers have to earn nearly triple the federal minimum wage of $5.15 per hour to afford the rent on a modest two-bedroom apartment, reports the National Low Income Housing Coalition (NLIHC) in its September 2002 report, "Out of Reach." And, while both homeowners and renters are burdened with the high cost of housing, renters are twice as likely to live in substandard conditions.

The federal government provides programs to owners and developers to subsidize affordable housing, including the HOME Investment Partnerships Program and the Low-Income Housing Tax Credit (LIHTC) program. HOME, a block grant program created by the National Affordable Housing Act of 1990, makes federal money available to state and local governments to produce low- and moderate-income housing. Through the required participation of nonprofit organizations, HOME funds activities such as housing rehabilitation, conversion, reconstruction, new construction, and tenant-based assistance.

LIHTC, established by Congress in 1986, provides private developers with a tax credit for the construction or rehabilitation of affordable rental units. The federal government gives states a per-capita allocation. States then distribute the funds according to their own qualified plans.

But, federal programs are not enough – for two reasons. There is more need than the federal programs can meet, and the applications for funds far exceed the number of dollars available for allocation. The fastest growing segment of the population with critical housing needs are families earning 50 percent to 120 percent of the area median income (AMI). And while there are federal programs targeted for families earning less than 60 percent of the AMI, the majority of this growing group has little or no access to assistance programs. According to the National Housing Conference's 2002 report, among households earning 50 percent to 80 percent of the AMI, the number with critical housing needs increased by 23 percent between 1997 and 1999. Households earning 80 percent to 120 percent of the AMI rose by 55 percent during the same time period.

While there isn't a clear definition for workforce housing, industry experts typically define it as people who work that earn 50 percent to 120 percent of the AMI. Because of the immense need for workforce housing and the limited funds available, it's critical that states, communities, and the private sector step in to fill the funding deficit. Some of the solutions we are seeing across the country include state bond measures, establishment of housing trust funds, and community specific housing initiatives.

In November 2002, California passed Proposition 46, the largest affordable housing bond measure in U.S. history. In total, the measure will finance $2.1 billion in affordable housing, with its largest segment, $910 million, earmarked for the creation of 22,000 permanent affordable rental units. The first round of funding was released in early 2003 and will result in approximately 8,000 units of affordable rental housing.

In Montgomery County, Md., where rents are extremely high and vacancy rates are minimal, a growing number of multifamily property owners are choosing to opt out of federal subsidy programs and begin charging market-rate rents. The Maryland Housing Initiative Fund has made preservation of affordable units a priority and provides assistance to nonprofits willing to purchase and manage affordable properties. To date, about 850 units have been preserved.

In Los Angeles, where there is a 250,000-unit housing deficit and 50 percent of all renters spend more than 30 percent of their incomes on rent, Century Housing and the National Housing Development Corp., two nonprofits, have teamed with Mayor James Hahn and the city of Los Angeles to develop a new $200 million program called "LA Win!," Los Angeles Workforce (Housing) Initiative Network. LA Win! will create affordable rental housing and homeownership opportunities for working families, defined as those earning between $34,000 and $67,000 (60 percent to 120 percent of the Los Angeles AMI) and paying no more than 30 percent of their income for housing.

The housing needs of Los Angeles' working families are becoming more critical. Vital municipal workers, such as teachers and police officers, and blue collar service sector and retail workers are unable to afford to live near where they work. Minimum wage earners are particularly at risk as rents rise faster than inflation and much more rapidly than their incomes. In frustration, families begin to leave high-cost housing markets and employers have difficulty attracting new workers. As the recent report, "In Short Supply," by the Los Angeles Housing Crisis Task Force concluded, "The city's housing prices have risen so high that they not only devour the wages of working families, but also threaten the city's continued economic growth."

This same reality is being felt in cities across the country, and programs such as LA Win! are only part of the solution. Municipalities and the private sector also must get involved in bringing solutions to bear on the housing crisis. For their part, cities must help bring down the cost of building workforce and affordable housing. Softening requirements on zoning, parking, and impact fees and fast tracking approval times are just some of the solutions. It also is critical that cities adjust their thinking on density issues. Some cities, such as Dallas and Portland, Ore., are beginning to allow higher densities, effective mixed-use infill projects with residential components, and transit-oriented housing development, but more cities need to follow suit.

It can be difficult to convince municipalities to allow mixed-use development and give up the sales tax receipts they receive from strictly retail use properties. But, in areas of huge population growth, such as Southern California, some cities are beginning to rethink the issue. Projections show that in the next 20 years, Orange County – the state's second largest county and an area with a reputation for being a largely suburban environment favoring large homes on oversized lots – will grow by 600,000 residents, but there will be virtually no more vacant land on which to build. Looking ahead, several Orange County cities have begun converting old, dysfunctional strip retail centers–which are numerous in the county–into mixed-use communities with apartments, condos, and townhouses. The new housing units are built on the former parking lots and over rehabilitated retail space.

Private developers across the country also are changing their focus to include mixed-use, infill development. To make a profit while developing workforce and affordable housing within their projects, private developers can partner with nonprofit housing organizations, which are eligible to receive bond monies and tax credits. The projects, most often structured with the nonprofit as managing partner, could include a mix of residential unit types – for instance, 80 percent market-rate units with the balance dedicated to permanent workforce or affordable housing. Nonprofit organizations also are effective partners because they generally have established relationships with municipalities and can often assist in processing and approvals.

But, workforce housing should mean more than just providing units for basic shelter. Housing should be viewed in the wider context of the community and intertwined with elements that promote social values. Affordable and workforce housing communities should be enhanced by services designed to answer residents' most critical needs, such as on-site childcare, access to transportation and jobs, and job training. By developing communities that bond decent workforce housing with quality of life considerations, we build stronger, sustainable communities, and better lives.

–G. Allan Kingston is president and CEO of Culver City, Calif.?based Century Housing, a nonprofit corporation.