Strategies ’06
On supply and demand:
“Spiraling construction and land costs seem to be our two biggest challenges looking forward. Both are well outpacing rent growth. For-sale product would seem to be the solution, but obviously the market can only handle so much supply, and it’s unknown how long interest rates will keep for-sale product within affordable reach. Market oversupply in certain for-sale markets will also present a challenge.” –Steve Patterson, president and CEO, ZOM Development
On capital concerns:
“Investing capital via development and acquisitions with a projected internal rate of return greater than the weighted average cost of capital. Both the development and acquisition arenas remain very competitive, and the cost of capital will rise as interest rates rise.” –Keith Oden, president and COO, Camden Property Trust
On national challenges:
“Clearly, the rebuilding of New Orleans and surrounding areas devastated by Katrina and Rita and the production of affordable housing strike me as the biggest immediate domestic moral, if not fiscal, challenges for our industry and our country. The evacuation of New Orleans vividly demonstrated the underbelly of the beast of poverty in this country. With appropriate governmental leadership, ranging from regulatory reform to environmental and insurance assistance, and the redirection of resources, the power and energy of the private housing market can be successfully harnessed and mobilized (as it was following World War II), to create the housing and jobs this country so desperately needs.” –Tom Osterman, partner, Sterling Equities
On top goals:
- “Mitigating risks associated with rising production costs and land entitlements. We will accomplish this with an even higher level of due diligence and research.
- Growing revenues via select multifamily for-sale opportunities. We will accomplish this primarily with significant presales or rental as a viable alternative.
- Enhancing the lifestyle afforded our residents and buyers with creative locations, design solutions, services, and amenities. Identifying development sites with special lifestyle adjacencies, guiding talented designers with well-founded market understanding, and staying in step with our evolving customer profile will all play a role here.” –Steve Patterson, president and CEO, ZOM Development
On maximizing potential:
- “Achieving same property net operating income growth in excess of the inflation rate (projected at 3 percent in 2006).
- Realizing the potential of YieldStar (our new revenue management system), which we are currently implementing.
- Delivering new development communities, which are currently under construction at or above projected yields.” –Keith Oden, president and COO, Camden Property Trust
On technology:
“At Stratus, we are in the early stages of a software transition that is the single largest focus of energy for the coming year. We hope to roll out consistent software (we currently have five different accounts-receivable software programs) to 75 percent of our sites during the 2006 calendar year. Our second largest goal is to address ‘process’ issues with a vision toward automation and a reduction of manual and redundant procedures. Finally, we hope to better integrate our satellite offices with corporate headquarters.” –Steve Heimler, president and CEO, Stratus Real Estate
On growing the portfolio:
“Sterling American’s philosophy of investing has always been on the management of risk to preserve capital, create long-term wealth. and generate superior returns. For the first time in many years, this philosophy has led to a reversal in the balance of our most recent $1 billion of acquisitions from two-thirds multifamily to two-thirds commercial. We believe, however, that there will be opportunities to increase our multifamily holdings in 2006 and beyond through:
- Ground-up development
- The acquisition of highly leveraged and distressed assets subject to the pressures of rising interest rates and increased operating costs that cannot be entirely off-set by rent increases
- Joint-ventures and acquisitions of multifamily assets, often with local partners, that can benefit from the infusion of new capital, and the advantages offered by Sterling American’s extensive resources and operating experience in 43 states” –Tom Osterman, partner, Sterling Equities
On leading:
“[We want] to maintain and extend our franchise position in our high-barrier coastal markets. For many years, AvalonBay has enjoyed a unique competitive position in high barrier-to-entry markets as a leading operator and value-added investor. Over the last couple of years, others have adopted various elements of our strategy. As a result, we need to work hard to continue to maintain a leadership position. …On the investments side, we will focus on targeting opportunities that play to our strengths, where financial capacity, reputation, an integrated operating platform, and creative deal structuring can set us apart from our competitors.” –Tim Naughton, president, AvalonBay Communities
On operational issues:
“It is my opinion that clients in our markets will not feel the cap rate compression that was experienced for the last few years and will therefore refocus on traditional operations in an effort to grow net operating income and their values. Property managers will be challenged to decrease concessions where possible and continue to push ‘other income,’ such as RUBS programs to bolster net collections. The industry will continue to be challenged in the areas of technological integration and education of on-site staff. As the tech wave continues to add value to the industry, the high annual attrition rates of employees will become a larger issue to control.” –Steve Heimler, president and CEO, Stratus Real Estate
On big challenges:
- “Rising interest rates. To address these, we will continue to stagger our debt maturities when issuing/refinancing activities occur, and we will maintain a level of floating rate debt approximating 20 percent.
- Construction cost increases. We will continue to closely monitor costs and update projections as necessary. We may “value-engineer” existing design plans and scale back some luxury items if needed, and we will use general contractors that are 100 percent bonded or subcontractors with sub-guard insurance.
- Raising rents. We need to capitalize on rental revenue growth in improving markets, in light of the last three years of weakness. Our new revenue management system will objectively evaluate opportunities to raise rents and maximize income.” –Keith Oden, president and COO, Camden Property Trust
On real estate:
“Perhaps the greatest industry challenge for next year will be whether real estate in general can continue to deliver strong returns for investors after having outperformed the broader market for the last few years. Real estate has fundamentally been re-priced in the capital markets during this time, and many believe the capital markets may have overshot on real estate valuations and that other asset classes might offer a more compelling opportunity over the next couple of years. If this proves to be the case, real estate will be hard-pressed to extend its winning streak that it has enjoyed for the last few years, despite improving fundamentals working in our favor during this part of the economic cycle.” –Tim Naughton, president, AvalonBay Communities
On finding deals:
“Sterling American Properties’ largest challenge for 2006 will be, as it was in 2005, to acquire multifamily and commercial properties at prices that can be justified by the underlying real estate fundamentals. It has taken increasingly more time and resources for Sterling to ‘ferret out’ value-added opportunities where we can apply our 35-plus years of knowledge and hands-on operating experience to create superior returns.” –Tom Osterman, partner, Sterling Equities
On new processes:
“The commitment to transition software systems represents a huge exposure in increased workload and frustration–managing the process will be our largest challenge in the coming year. That project is coupled with a revised education department that will be tasked with educating our field staff across four states and many cities with a goal of consistent processes throughout [our portfolio]. Finally, we feel challenged to continue to offer the highest possible level of service to our expanding base of clients and markets. This is a challenge that never goes away.” –Steve Heimler, president and CEO, Stratus Real Estate
On building and purchasing:
“We’re taking less risk on commodity cost increases in our construction purchasing. For example, in the past we may have floated with the lumber market, but will now often lock-in earlier and take delivery early in the job and store materials on site or in a subcontractor’s yard. We’re also increasing the level of national purchasing programs/contracts to increase our purchasing power with vendors and better leverage the scale of the organization. And, we’re being very sensitive in the programming of the communities, making certain not to over-program or over-spec a particular community relative to the targeted customer segment. In the past, there has been a tendency to be guilty of feature creep, where every successive community was being built to a higher spec than the previous community.” –Tim Naughton, president, AvalonBay Communities
On rents:
“In 2006, we anticipate a modest rise in rents, and a burning off of concessions as the disparity between the costs of ownership and renting continues to expand. Renting is currently a relative bargain in most areas of the country, compared to the cost of ownership. Rising interest rates and utility costs is likely to magnify the disparity in 2006.”–Tom Osterman, partner, Sterling Equities
On affordability:
“With a Fed that is fairly determined to slow growth with higher interest rates, combined with escalating construction and land costs, affordability will become an issue. Users and investors without alternatives and inadequate market understanding will continue to buy, but absorption is likely to fall, and prices will follow in many markets.” –Steve Patterson, president and CEO, ZOM Development
On adjustments:
“Condos have become a mainstream of the housing market and are not about to disappear. In 2006, however, we are anticipating a small downward price adjustment in most markets tied to a decline in investor confidence and rising interest rates. In some markets that we believe to be overheated due to investor activity (rather than purchases by owner-occupant), such as Miami and Las Vegas, we see the possibility of a more significant price adjustment.” –Tom Osterman, partner, Sterling Equities
On winners and losers:
“Some markets will be on top of the world, while others will likely find that broken deals will create a confused market that will ultimately benefit apartments.” –Steve Heimler, president and CEO, Stratus Real Estate On rents:
“They will increase by varying amounts, based upon geographical location. They will increase because higher interest rates mean higher mortgage rates for new home purchases, which are our biggest competition in our markets.” –Mark Fogelman, president and COO, Fogelman Properties
On rent growth:
“In our California markets we are anticipating 3 [percent] to 6 percent actual rent growth on the coast and 6 [percent] to 10 percent reduction of concessions in the Arizona and Central Valley markets. In Hawaii, we will expect 15 percent rental growth due to restricted supply and increasing demand.” –Steve Heimler, president and CEO, Stratus Real Estate On demand:
“We expect that apartment rents in general will climb at rates exceeding historic averages in most regions as home sales decline and apartment inventory continues to contract from conversion activity. Luxury rentals in overbuilt condo markets may not realize such aggressive rent growth due to competition from investor-owned condos.” –Steve Patterson, president and CEO, ZOM Development