Battle Test

Thirsting for insights: Terry Danner relies on his property-level managers to feed him information from areas he can’t visit every day. PHOTO: Stephen Dux

As CEO of Riverstone Residential Group, Terry Danner isn’t able to get out to the company’s properties as often as he’d like. So, he surveys site-level employees for their opinions on trends in the industry to get a grasp on what’s happening in all the places he can’t be.

“I have 120 regional managers. They all have different opinions,” he says. “You would think the industry would be homogenious, but they all think differently and they all run their properties differently.”

The Dallas-based firm’s most recent questionnaire, which will inform its strategy for the upcoming leasing season, focused on the opportunities and challenges leasing consultants will face this coming spring.

The survey canvassed 569 of the company’s property managers, ­assistant managers, and leasing professionals and provided insight as to which kinds of units—one- or two-bedrooms—were more popular, and how likely residents were to renew a lease, for example.

With more than 800 properties in its portfolio, that’s a lot of information to synthesize. But once all of the data are collected, Danner can sit down and sift through the results to get a feel for what’s happening on the ground—which is why no corporate staff is allowed to participate.

“I don’t want them tainted,” Danner says. “We’re making decisions based on the feedback.”

Dog-Eat-Dog Markets

The feedback gives form and color to the battlefield ahead. About 80 percent of Riverstone’s on-site staff say prospective renters are visiting between three and six properties in their search for a new apartment, driving fierce competition in markets from one coast to the other.

“It’s become more of a dog-eat-dog world,” Danner says. “There are a lot more [companies] vying for that type of client, so you’re going to have to go above and beyond so that somebody says, ‘Wow.’?”

In fact, 20 percent of respondents believe concessions will increase this year. While each submarket has its own dynamics, the aggregated­ results point to a much more competitive playing field across the ­nation—20 percent of the survey respondents equals about 114 staffers.

Ken Veltri, senior vice president at Chicago-based AMLI Residential, also believes competition will be fierce this year, though he’s cautiously optimistic.

“Just with the amount of supply coming on line, it’s going to be a fight for every resident,” he says. “And we want to make sure we put our best foot forward.”

Veltri’s keeping an eye on how the Houston market, in particular, performs this leasing season. Houston has seen a frenzied pace of new development, with more than 8,470 units coming on line last year and another 10,200 units slated for the metro area in 2014. And yet, the market’s rents grew 4 percent last year and are forecasted to grow another 4.4 percent this year, according to New York–based market research firm Reis.

“It’s been that kind of fantastic market for the last five years,” ­Veltri says. “We think the job growth is there to kind of support it, but we’re interested to see if that’s going to hold true.”

Danner believes rent growth may have already peaked in this cycle, and the survey results back him up. About 30 percent of Danner’s team believe rents could increase by about 3 percent this year, while another 38.5 percent peg rent growth at 2 percent or less. And nearly 5 percent believe rents will decrease this year.

Kellie Falk is a little more optimistic about how much longer operators will be able to push rents. She predicts several more years of opportunity—especially in Charleston, S.C., where her company, Drucker & Falk, manages 1,844 units.

In 2013, the Newport News, Va.–based company saw 4.6 percent rent growth in Charleston—outperforming a market that saw 3.6 percent rent growth overall, according to Reis. And Falk anticipates a similar increase this year. But, Falk, one of the firm’s managing directors, believes growth will slow next year as more apartments are built in the market.

“There are currently over 4,000 units under construction and an additional 3,600 proposed,” she says.

Danner is particularly eager to see how leasing season in Nashville, Tenn., will play out. Nashville’s population grew about 1.4 percent in 2013, and employment was up by 2.2 percent, according to a recent report from Phoenix-based advisory firm Hendricks-­Berkadia. More than 18,000 jobs were added to the metro last year, 2,700 of which were created by the opening of the city’s new convention center, ­Music City Center.

Riverstone will have several new buildings coming on line this year in Nashville, challenging the company to outperform competitors through the lease-up process. As part of that effort, creative marketing will be a huge component, Danner says.

“If you’re going to target the musicians, the music producers, you’ve got to give them something unique and then [give it] that image that it’s the place to be.”

Tom Manzo, of Los Angeles–based JRK Property Holdings, believes the best bet for leasing this year is Denver. The firm owns eight properties in the market and manages 19 there. The Denver metropolitan area’s population rose 1.7 percent in 2013, and employment grew by 2.6 percent, according to Hendricks-Berkadia.

“They’ve had, year after year now, the most consistent high growth,” says Manzo, president of JRK Residential Group. “Our renovations have been very successful there in terms of getting even more than we had hoped for.”

But competition is expected to be fierce in the Mile High City, as well: At the end of 2013, more than 11,000 units were under construction in the metro area, the report states.

Drucker & Falk chose Raleigh as one of the more stable markets for the company’s spring leasing campaign this year. Though rents dropped five years ago in North Carolina’s capital, Falk expects to raise rents by about 5 percent there this year. “The occupancies and rent growths are steady,” she says. “At this point, the supply has kept up with the demand without sacrificing ­occupancy or rent growth.”

Meanwhile, AMLI’s Veltri is interested in Atlanta’s performance as the city seeks to attract more residents from the suburbs back into downtown.

“The city is pushing so much money into the revitalization of downtown,” Veltri says. “And we think it’ll be very positive and interesting if an inward migration ­occurs.”

Digital Connections

One way that many firms are hoping to differentiate themselves is through technology.
According to the Riverstone survey, 67.5 percent of the company’s on-site employees feel prospective renters prefer to communicate via e-mail during the leasing process. And 64 percent of residents want to pay their rent online.

“With online leasing, I can go online, I can pick an apartment, and I can see the view,” Danner says. “I can apply online and I can get approved online. I can execute with a digital signature and all I have to do is show up and show my driver’s license and sign the lease. I think that’s what everybody wants. We just want to know how to make that happen.”

But, interestingly, electronic communication isn’t always preferred, particularly if something’s broken: More than 60 percent of Riverstone residents prefer to call the office to submit service requests.

Fine-tuning its digital leasing practices is something the team at AMLI is researching for the upcoming season, says Veltri. Expanding its relationship with a national Web-based property management software company is something AMLI is ­considering.

“For us, we’ve always done everything in-house,” Veltri says. “[But now], we’re finding that some of the national players in the tech space, like RealPage, are able to devote more time and resources to the issues. We think their products have become on par [with the digital landscape nowadays] and will let us focus on our $2.2 billion development pipeline.”

JRK’s Manzo stresses the importance of having up-to-date websites for each property within a company’s portfolio—especially those still under development. Manzo says information is power when it comes to attracting prospective tenants to prospective buildings.

“[We need to] get professional renderings done and make sure we get those out so people can see what’s in store,” he says.

ADDING VALUE

Manzo may be busy procuring new renderings in part because ­acquisition-rehabilitation deals will play a large role in JRK’s year.

“A lot of our renovations are finishing up right now or will be finished up in the first quarter, making us poised to really pop coming into the summer,” he says.

Meanwhile, the AMLI team doesn’t do heavy rehabs but adds value through in-house upgrades such as backsplashes and hardware, Veltri says. Its units may see up to $10,000 in moderate renovations as the properties age or become worn. But the company renovates only a few units at a time to test the waters in a given building or market, with the hope of getting about 20 percent of a return on the investment.

“We really get a feel for whether that return is being realized or not,” Veltri says. “We’ve had great success doing that.”

Danner, also, feels value-add rehabs will stay relevant this year, but he doesn’t believe they’ll become any more important than they’ve been the past two years.

“It’s been pretty good for the last 18 months, and I think we’ve peaked,” he says. “I think it’ll be a slow ­decline.”