Niche Guys Win

Until the Great Recession, conventional wisdom suggested that owning and operating across a diverse swath of geographic markets could protect your company against a downturn.

How quaint.

Among the lessons we’ve learned in the years since is that big is not always better, especially compared with small firms with deep local market knowledge, patient and adequate capital, and the discipline to manage not for short-term gain but for long-term value.

We think the five firms highlighted on the next few pages have mastered those lessons. While they’ve all achieved success in different ways—LumaCorp. serves working-class Texas residents while the Gotham Organization develops luxury properties for New Yorkers, for example—these companies share a singular commitment to the very specific business models they’ve created.

With that in mind, meet the local heroes.

Capital Stewards: Raintree Partners

If you were to look at just a few numbers—seven employees, five years in business—for Raintree Partners, you might write off this ­Laguna Niguel, Calif., firm as a start-up not ready for prime time.

You’d be making a mistake. Founded by Jeff Allen, formerly a managing partner with SSR Realty Advisors and an executive at both Security Capital and Paragon Group, Raintree comes with an impeccable pedigree. Since its establishment in 2007, its reputation as an important opportunistic player in West Coast markets has fueled its rapid evolution into a 2,000-unit ­portfolio.

“We were spinning our wheels with other [people] when these guys came in with a very clear business plan,” says Greg Reed, a senior vice president at Beech Street Capital in Newport Beach, ­Calif., who began working with Raintree in 2008. “They understand the product, and they know what the endgame looks like from the very beginning,” adds Kristen Croxton, also a senior vice president at Beech Street. “They’ve never shown us a deal that we didn’t want to do.”

How did Raintree get such a fast start? Capital connections.

“When I started the company, I formed a strategic relationship with an institutional investor who committed a significant amount of equity capital to our firm,” Allen says. That translated into a $200 million fund for Raintree, which wants to acquire Class A and B properties in major and secondary markets.

It took several years before the company deployed those dollars. “Jeff was very patient at first,” says Mark A. Petersen, a managing director at Holliday Fenoglio Fowler who has known Allen since 1994. “He had that money early, but he didn’t go out and spend it without thought.”

Finally, Allen found what Raintree wanted: institutional-quality assets in appealing California markets. “We bought two properties in 2009, and they both have had a significant run-up in value since then,” he says. “My biggest regret is that we didn’t load the boat with property back then, but I was just as afraid as everyone else that the world might come to an end. It was a very scary time.”

Allen’s probably the only one second-guessing any of his acquisition decisions, however. “Jeff has taken something away from every career he’s had and applied it to Raintree to be a careful steward of capital. He’s very methodical, he gets into the details, and he knows the business backward and forward,” says Petersen. “He moved early in 2010, especially when a lot of people were scratching their heads and wondering what to do. He was one of the more prolific buyers in California in 2010.”As investors flock to multifamily, though, that feat may be hard to repeat for Raintree, which hopes to grow through acquisition and new development. (Alliance Residential and Pinnacle currently manage Raintree’s assets.)

“Of course, competition in our target markets is fierce,” says ­Allen, whose firm has adjusted its strategy in response to these shifts. “Although we target the larger, coastal California markets … we have gravitated over the past 18 months to the pursuit of smaller properties and older properties where we can add value by rehabbing or repositioning the product. Lately, we’ve also been pursuing several ground-up development opportunities. We like deals where we can create value.”

Market Counter-Puncher: RMK Management

When you share the same city with multifamily firms such as Equity Residential and AMLI Residential, not to mention a host of powerhouse commercial real estate companies, you’d better know what you’re doing.

RMK Management does. “We know everything there is to know about apartments,” says Anthony Rossi Sr., who serves as president of the Chicago-based firm, which oversees 8,000 units, primarily in the city and its suburbs. (The firm also manages a few properties in ­Minneapolis.)

As geographically concentrated as RMK’s portfolio is, though, it’s diverse in terms of product type, ranging from spacious garden-style communities in the outer Chicagoland suburbs to new high-rises in the city’s Near North Side. “We’ve done everything: two- to three-story buildings, mid-rise, high-rise, suburban, urban,” says Rossi. “It gives us a pretty good base on a property type when we’re pitching a deal.”

So does RMK’s vertical integration. In addition to its management company, RMK operates a multifamily rehab and renovation business known as RMK Restoration and a development arm (M&R Development) responsible for developing more than 3,300 apartments in the Windy City and its suburbs. It is also affiliated with multifamily advisory firm Moran and Co.

It adds up to an appealing package for clients. “They have such a deep platform,” says Paul Boneham, a Chicago-based executive vice president and head of transactions for Bentall Kennedy, a North American real estate investment advisory firm in the United States and Canada.

Boneham knows because he’s seen RMK—and its affiliates—in action. Most recently, RMK Restoration has been handling a $25 million update of McClurg Court Center, a downtown Chicago apartment complex built in the 1970s and now owned by Boneham’s firm. The manager of this 1,048-unit, two-building property? RMK.

Boneham’s also familiar with M&R Development. “They brought us the development opportunity [of Coventry Glen, a 280-unit property in suburban Chicago] seven or eight years ago,” he remembers. “They developed it, and it was a seamless transition to the management company and executing the property’s management plan.”

Those plans typically include generous and carefully considered amenities.

“They work hard to ensure their buildings and communities are ‘best in class’ and have a strong core belief in honest communication and providing superior service to their tenants,” observes Tracy S. Larrison, a senior vice president at PNC Real Estate in Chicago, where he has worked with RMK for more than a decade on everything from construction loans to banking. “There is also an intense focus on delivering innovative services and amenities to residents.”

At Versailles on the Lakes in Schaumburg, Ill., RMK tore down the existing clubhouse to build a new, $2 million structure with a demonstration kitchen and a kids’ room within the exercise area so that parents can work out and check on their children. In contrast, the Summit on Lake, a 42-story property under development in Chicago’s East Loop, will offer free bike sharing and a bike room for residents interested in exploring the nearby Millennium Park and Lake Michigan waterfront.

RMK stays flexible in terms of technology, too, investing in new programs and hardware where the firm feels it makes sense. “We recently completed a high-rise where everything is electronic,” Rossi says. “The brochure is a flash drive, and leasing agents walk around with iPads.”

Lean Living: LumaCorp.

While the industry hunts the irresistible renter-by-choice demographic, LumaCorp. quietly owns and operates a 4,800-unit portfolio of 1980s, Class B properties managed to meet the needs of working-class renters.

Why? “Because that’s where the market is,” says Rich Kelly, principal and co-partner of Dallas-based LumaCorp. “These people historically can’t buy a house, but they still want clean, quality, safe housing. We think it’s a much bigger slice of the market than the other [renter demographic] stories you hear.”

So that’s what LumaCorp. provides, from the Dallas–Fort Worth suburbs to small East Texas cities such as Lufkin and Longview. Depending on the market, property, and unit, rent can run as low as $515 for a one-bedroom to $900 for a two-bedroom. Rent growth can be modest, but Jim Mattingly, LumaCorp.’s president and Kelly’s co-partner, says that’s OK. “One of the advantages of owning property in small tertiary markets is that they are less active [in terms of new construction and competition],” Mattingly explains. “The rent growth is more predictable.”

Of course, tertiary markets also have a major disadvantage for multifamily firms: They have a much smaller talent pool for open jobs. To help managers better evaluate potential hires, LumaCorp. in recent years began administering personality and aptitude tests to job applicants. “The tests are not foolproof, but the more data we get, the better decisions we make,” says Mattingly.

LumaCorp. begins its path to rent growth with old-fashioned real estate research, looking for distressed or underperforming working-class properties with potential. “We make money by fixing problems,” Kelly says.But the firm isn’t interested in just any Class B property with deferred maintenance and an attractive price. “We’re very picky about the properties we acquire,” Mattingly says. “We know our market very well, and we know what works in terms of floor plans, unit mix, and architectural designs. We pick a property with good bones, and then we invest the money to bring it up to our standards.”

“I look at the numbers, and LumaCorp. runs some of the tighter costs that I’ve seen,” says Larry Sneathern, senior vice president, originations, for Beech Street Capital in Dallas. “Yet when you drive up to the property, it always looks terrific. Some multifamily firms spend lots of money, and their properties still look tired.”

Only a few properties will make the cut for the LumaCorp. treatment. “We might look at 100 packages. Out of that, we’ll find 20 worth looking at, and 10 will get offers. One might get done,” says Kelly, who made “a couple dozen offers” in 2011 and got one—Bardin Oaks in Arlington, Texas. That’s partially due to LumaCorp.’s choosiness, but it’s also a reflection of the highly competitive market for multifamily investment today.

Kelly’d like to grow the firm’s portfolio in 2012, but that depends on “investor capital and the right deals,” he says. Unlike larger firms, LumaCorp. looks for the deal first and the investors second, reaching out to its network of high–net-worth individuals once ­LumaCorp. has found an opportunity worth pursuing with its own funds and its investors’ capital.

“Some people [in the multifamily industry] are closer to the money—they talk to the pension funds,” Kelly says. “We’re closer to the real estate.”

Strike Force: J.I. Kislak

J.I. Kislak will celebrate its 106th birthday in 2012, but this diversified, family-owned real estate firm hardly qualifies as crotchety senior corporate citizen. “Although they have a multigenerational strategy which encourages them to invest for the long term, they often move like lightning to seize opportunities,” says Robert Kaplan, principal with Ackman-Ziff Real Estate Group in Miami, which is one of Kislak’s real estate capital markets advisors.

That’s a move that Tom Bartelmo, the firm’s president and CEO, hopes and expects to be doing more of this year. “My goals [in 2012] are to purchase two or three opportunistic deals,” he says. Currently, the Miami Lakes, Fla.–based company owns and manages 3,200 units, mostly in secondary markets such as Pensacola, Fla., and Tucson, Ariz., and Bartelmo would like to see some growth.

But like many small owners, Bartelmo finds himself up against bidders with big checkbooks. “Our challenges center around the fact that the big players have so much institutional money,” he says. “But that challenge is also an advantage: It really allows us to focus on opportunistic deals and distressed assets.”

That’s become a significant initiative for Kislak these days. In addition to its multifamily portfolio and a New Jersey–based multifamily brokerage business, the firm in 2009 started Sunshine States Certificates, which purchases tax certificates for properties with delinquent tax bills. (To get the certificate, Kislak pays the outstanding real estate taxes, which establishes a lien—owed to Kislak—on the property.)The firm isn’t afraid of taking the occasional risk. In late 2010, Kislak did a particularly “messy deal,” purchasing a group of three Pensacola, Fla., properties that had gone into foreclosure; one of those was a broken condo, where units were split between owners and renters. A little more than a year later, the property is in the final phases of lease-up. “We’ve worked out any lingering issues,” ­Bartelmo says.

It takes time to harvest the value of an asset like that, but that’s OK with Kislak. “We’re mostly family money, so when we buy something, we don’t have an end date on it,” Bartelmo says. “When we’ve sold things, we’ve done it because we felt the market was giving us a fair price.”

Edge Development: Gotham Organization

As you might expect given the firm’s name, the Gotham Organization focuses on New York. Founded in 1931, it has evolved from a real estate and construction firm to an elite developer, owner, and operator of distinctive New York apartment buildings.

To accomplish that feat, the family-owned firm (run by CEO Joel I. Picket and his son and president, David Picket) draws on its own extensive expertise and knowledge of the city, creating Gotham-owned properties precisely suited for their locations. “We’re all New Yorkers,” says Melissa Pianko, Gotham’s executive vice president of development. “We can tell you block by block what differentiates that area.”

At The Corner, a 196-unit luxury rental property at 72nd and Broadway, the property’s city-loving residents can marvel at the busy streets below and gaze at the New York skyline on a rooftop terrace with a fireplace and projection screen. The 374-unit Atlas New York, located in the Fashion District, houses contestants for Project Runway on Bravo.

“We are long-term bullish on New York,” Pianko says. “We understand the fundamentals of specific neighborhoods and how to build the right product based on location.”

But the amenities, buzz, and size of those properties are dwarfed by Gotham’s latest development.

The massive, $520 million, mixed-use development is happening on nearly a full city block, whose previous warehouses and other industrial buildings were originally condemned by the city for housing in the 1970s. Nearly 40 years later, Gotham is developing and building a property that will include 1,250 units of housing (both market-rate and affordable), retail, and an elementary school. “Although we do not have a large development staff, we do very large deals,” says Pianko, who expects the project to take three years.

The showstopper? A 10,000-square-foot outdoor courtyard for residents. “On the far West Side, there’s not a lot of green space. This courtyard will be like a private oasis in the middle of New York,” Pianko says. “We really look at what’s lacking in a neighborhood and how we can make it better.”

For Gloria Glas, the architect who designed the development, it’s that level of thought and decision making that differentiates the ­Gotham Organization from others. “In many cases, when you have a group that is not so knowledgeable, you have to induce questions,” says Glas, a partner at SLCE Architects in New York. Gotham’s executives “have thought [the project] through.”

The biggest challenge for Gotham, unlike many small firms, isn’t capital. “We have access to as much capital as we could ever want,” Pianko says. “It’s buying land at the right price [that’s tricky]. If we think something’s a good deal, chances are we have competition.”

Alison Rice, a former editor of Multifamily Executive, is a freelance writer based in Arlington, Va.