Executives are concerned, however, about the shadow market’s threat in overheated markets like Las Vegas and South Florida. In Vegas, about half of the rental projects bought for condo conversion (which was about 20 percent of the rental pool) are expected to come back online as rentals.
Just ask Harrelson of Pinnacle, which manages more than 12,000 units in the greater Las Vegas area. If the shadow market is going to have a painful effect on the rental market anywhere, he predicts, it’s probably going to be in Vegas because of the overall size of the market and the rental inventory. Last year, Pinnacle saw more than 5 percent year-over-year rent growth in the market, but the firm is estimating only a 2 percent rise for ’07. “We’d love to be wrong,” Harrelson adds.
Troutman of Picerne Real Estate is a bit more optimistic about the Sin City’s future, especially for luxury rental product. She anticipates a continued strong year for her company’s Class A portfolio because the Vegas market offers a steady flow of apartment demand, plus the typically lower-end condo-converted units aren’t a direct competitor to luxury rental product.
Troutman is more worried about the oversupply threat in certain sub-markets of Phoenix—Picerne’s other major market for luxury rentals. The company is already seeing a hasty return to concessions (yes, the “C” word) in Chandler, Ariz., a major Phoenix suburb which has maintained a healthy development pipeline over the past several years.
Despite these potential threats, executives expect a strong ‘07 for the apartment sector overall. “We will continue to see corrections in the housing market and that uncertainty is going to change the marketplace,” says Mike Godwin, president and CEO of Valdosta, Ga.-based Ambling Cos. “The weaknesses created by poor credit underwriting practices coupled with the volatility of interest rates and the failures in the sub-prime lending market will negatively impact single-family development. You add all those things together, and that signals good times are ahead for multifamily.”
TECH UPGRADES A strong ’06 helped companies expand their technology offerings.
The big multifamily firms spent even bigger money last year on tech investments and enhancements. While companies scheduled their tech deployments well before last year’s for-sale housing slowdown, the strong apartment market conditions allowed these forward-thinking firms to get maximum value out of their tech investments.
The perfect example: Equity Residential, which implemented a new operating platform across its entire portfolio of about 650 properties. Major enhancements include an online purchasing system and the increasingly popular revenue management system. The rollout was challenging, as expected, but the healthy market provided a comforting backdrop to make the transitions less painful.
“The good news was we had a good, strong year at our back along with those system changes,” says Fred Tuomi, Equity’s executive vice president and president of property management.
The hottest new tech addition last year: revenue management systems. Tuomi expects more big companies to get on board with the pricing concept, which has been popular for years in the airline industry. “We waited for the technology to be more established and proven before we actually jumped in,” says Tuomi. “Now that some leaders in the industry have implemented it, we’re going to see more companies do it.”