Multifamily Enjoys Good Fortunes

The February 2011 CEL newsletter has a good commentary on the state of real estate today including some less discussed positive factors for multifamily real estate.

Demographics, declining home ownership, and reduced supply (fewer multifamily starts) are prominent in all multifamily forecast discussions - as they should be. Some less discussed factors are that only 12% of renters have plans to buy and rising transportation costs are making renting close to work in an urban environment more attractive. The rising average age of household formations and births of first children is also a big positive for the industry. The decoupling of improving occupancy rates and effective rents from employment statistics is real and here to stay. The economy’s recovery is going to be a long road, fortunately the multifamily industry is going to lead the way forward in this cycle. Chris Lee even forecasts further cap rate compression, which is somewhat surprising given the expectation of rising interest rates.

See http://tiny.cc/4on1u for Chris Lee's article. REIT.com also has an interesting look at declining multifamily vacancy at http://tiny.cc/oui7a

Five Essential Ingredients of Innovation Excellence

Five essential ingredients of innovation excellence are 1) giving employees something to believe in, 2) embracing vision and protecting ownership, 3) nurturing receptivity, 4) championing connectivity and forcing transparency, and 5) building a positive environment and being generous with genuine accolades. Successful, remarkable companies understand inherent instability is necessary to remain the best in the industry. Taking the perceived “safe route” or trying to avoid every potential pitfall is actually the riskiest route to take in the long run. You can’t be a follower and just keep riding the same old engine down the track, because in reality there is no engine and there is no track. That is not to say that every project needs to be reinvented from scratch, it’s just that your products needs to stand out and be fresh - and achieving that takes a specific culture. Innovation and change are necessary elements of success – it is what Pixar’s founder Ed Catmull calls “organizational quaking” in his interview with The Economist.

1. Something to Believe In
To be motivated and effective, people have to know in their heart that they matter and what they are doing matters - they have to believe in themselves, their contributions, their colleagues and the company. Leadership can’t just tell people “they matter”. The proof will occur through the everyday actions of the group. The most successful organizations leverage the skills, thoughts, and life experiences of all the people in their organization as well as those in their vendor and partner organizations. Creating a dynamic where everyone is part of the process, provides honest input, and contributes in a positive way takes a positive corporate culture - within a framework of scalable, repeatable, continuously improved processes and systems.

2. Embracing Vision and Protecting Ownership
Creativity, particularly the vision of those in defined value creating roles, has to be protected. Decisions need to lay with the creative person. While, the process draws on the resources of the whole organization, hijacking the vision and the decision process will lead to a lack of ownership and at best, long term mediocrity. Patronizing lip service to empowering people breeds disengagement. No one in the organization should be able to go around the creative person or tell them they have to do something a specific way - or eventually there will be no process and the decisions will be left to puppeteers to make on their own without the support of the group. Are things really going badly enough in the process that someone needs to step in? Have all attempts to provide honest and constructive help to the team been exhausted? If so, before attempting to take over the minutia of the decision making, leadership ought to consider replacing the visionary.

3. Nurturing receptivity, reciprocity and honesty
Individuals not only have to be receptive to the input and assistance of others, they have to actively seek it out. By nature, people are hesitant to both seek and give honest and heartfelt advice, feedback and assistance. An environment needs to be nurtured where people trust that what they have to say is honestly valued and respected, that people won’t be offended, that they won’t be belittled or ridiculed for their opinion, and that they won’t look dumb for bringing something up. At the same time, group meetings where people “perform for the audience” rather than honestly contribute to the success of the effort have to be minimized. There also has to be reciprocity – a belief that others will act positively to help them, just as they are helping others - without expectations of net gain. This is not group think or paralysis by analysis – there is a defined decision maker who is responsible and who moves forward after thoughtful consideration of the input. Keeping score or owing each other favors is a negative culture to be avoided. Reciprocity has to be a commitment to give more than you receive and to place the interests of the group above your own without the culture of, “what can you do for me”? The Go-Giver, a book by Bob Burg and John Adam Mann is a great story about receptivity, reciprocity, and giving.

4. Championing Connectivity and Forcing Transparency
In order to be a part of everyday successes, people have to be connected and they have to know what is going on. If meetings are the primary means of people staying informed and connected in your organization, you have a steep hill to climb and you may want to read some of Seth Godin’s work. Communication, information and decisions have to move at lightning speed.

Continuous improvement necessitates looking back (as well as forward) and transparency is a prerequisite of learning. Everyone would rather accentuate the positive and talk about success rather than talk about the things that went (or are going) wrong. It is important to recognize contributions and shower praise where appropriate. However, some things always go wrong, and it is important to talk about key issues in a constructive way in order to move forward. Mistakes are repeated, and problems fester, if you don’t own up to them and address the causes. Don’t dwell on it, but force people to discuss what goes wrong rather than brush it under the rug. If you avoid the hard conversations, people are incrementally less forthright in the future, pushed towards conservative approaches, and disenchanted. Catastrophic failure is often rooted in a series of mistakes that go unaddressed or unacknowledged, whose cumulative effects are therefore unseen until it is too late.

5. Building a Positive Environment
People who know what they are doing matters, who are engaged and connected in an organization that protects creative vision and honesty are going to be highly motivated. A major premise of the book the Fish Philosophy by John Christensen is “There is a choice about the way you do your work, even if there is not a choice about the work itself.” Positive attitude at a basic level is a prerequisite to success as described in this well written book; but unleashing organizational potential requires standing out, distinguishing the organization, and being innovative. Inspiring and empowering people within the framework of your business model does involve choice about the work itself.

References:
The Go-Giver
Fish Philosophy
Why Should Anyone Trust Your Vision
Seth Godin's Blog
Pixar founder Ed Catmull interview

Talent - An Opportunity or a Crisis

Chris Lee forecasts a real estate industry talent shortage and discusses coming human resources challenges and compensation strategy in his most recent newsletter. Set aside initial reactions to a forecast of “talent shortages” today; and think hard about core competencies, internalization and real understanding of goals and culture.

In pursuit of cost containment (and often times mere survival), the multifamily industry has obviously gone through significant staffing cutbacks in the past two years. “Bench strength” within individual organizations is something to start considering in light of the business climate being forecast for the next few years. Arguably, there still is a lot of available and/or underutilized talent in the market. Companies are upgrading talent, retooling retention plans, revising compensation programs, and looking at their future staffing needs and with that process will come turnover as the market improves. Companies that are leveraging strong scalable, repeatable processes and systems will be better positioned to deal with the dynamic environment. However, the costs of loss of momentum, continuity and institutional knowledge can still be high. Leadership continuity, building talent within, retaining managers, replacement planning, and succession need to be actively managed and focused on for future success.

See CEL and Associates Inc’ Strategic Advantage Newsletter “Talent…Opportunity or Crisis” at http://tiny.cc/a3qk7 For tools, guidance, and an in-depth look at ensuring leadership continuity and building talent within see the book "Effective Succession Planning", by William J Rothwell.

Multifamily perspective on the News

At the MFE conference, CEO's and executives were VERY bullish on 2011 for the multifamily industry. The Fed plan to fuel inflation, world posturing on Chinese currency valuation, off shore drilling regulations, GDP growth are all in the news - what does it mean for the multifamily industry?

Realistic Pro-forma Hurdle Rates. When historical new development hurdle rates (150 to 200 basis points over sales cap rates) start making new multifamily development pro-forma’s pencil out, a surge in new projects is expected. In today’s environment with sub 5 percent cap rates in many markets and significant levels of uncertainty, listening to the September 2010 NMHC Apartment Strategies Update raised the question, are those hurdles appropriate? The approval process, construction, lease up, and sale of a new property can take years and are the expectations for the future multifamily market, the associated risks, and the interest rates (a few years from now) going to be better, the same, or worse than past history?

Supply and Demand Look Good. Demographics, declining home ownership rates, decoupling, and a dearth of new construction starts are obviously in the multifamily industry’s favor from a simple supply and demand viewpoint. Multifamily vacancy rates have been declining throughout 2010 with RECORD BREAKING net absorptions, concessions burning off and rent increases starting in many markets. These fundamental indicators depict the best conditions in decades are within reach, but is the pace sustainable?

Unemployment’s heavy weight. Consistent GDP growth in excess of 3.3% is necessary to just keep unemployment from growing due to population growth. GDP growth in excess of 3.3% does not look realistic in the near term, so real unemployment will continue to rise. Government spending will not help. The key term is “growth” and unless the amount of money spent grows every quarter, GDP growth does not go up. So, stimulus money is not going to improve the situation (even with the “other half” of the stimulus that has yet to enter the economy). Unemployment data, (as manipulated as it is to hide the true extent of unemployment), is not going to make many people FEEL like progress is being made for some time – even after progress is made. The Fed's stated intentional pursuit of higher inflation to generate job growth is a risky plan which some experts give marginal chances of succeeding (Greg Weldon places the odds at 2:1 against success). Two key questions are how does continued high unemployment (and other factors) effect the notion of job security for those with jobs, and what are the resulting long term implications for consumer spending (the true driver of the economy)? Multifamily cycles are normally closely correlated to employment, but so far in 2010 the unemployment data and industry performance have diverged. The growing population still needs housing.

Negative Consumer Psyche. There are the obvious weights on American consumers that continue to get news coverage. Debt deleveraging and foreclosures get the most press. The anchoring of homeowners in place by not being able or willing to sell their homes is another drag. The situation with home foreclosures got even murkier at the end of September with foreclosures slowing to a crawl from revelations of “robo-signing” foreclosure documents by GMAC (Freddie Mac’s processor), B of A and JP Morgan. Many others are privately scrambling to clean up their processes. The long drawn out process will get worse as class action lawsuits are filed and state attorney generals file their politically motivated lawsuits. Extend and pretend, strategic defaults, and lawsuits can’t last forever, but bad real estate loans and foreclosures are going to continue to be in the news and a drag on lenders books and the American psyche for a long time to come. Strategic defaulters will continue to live rent free, potentially bad news for multifamily.

Politics is Adding to the Problem. The current political environment and election cycle is the source of much uncertainty and divisiveness. In broad terms, pride and confidence (or lack thereof) in the American system is reflected in congressional approval ratings. In terms of regional markets, how cyclical is multifamily going to be in the future as a result? The metropolitan Washington DC area for instance has enjoyed a recent boom, which many are rushing to take advantage of. If the movement to reduce the size of government gains traction, what multifamily market effects will be felt in Washington and other metro areas around the country that are highly dependent on government? How drastic are the swings going to be? What impact will it have on subsidized housing in general? High barrier to entry markets are less susceptible to huge swings over time, but even they are vulnerable in the current market. Set the scare tactics aside - turning back spending is tough, but will the 2010 mid-terms bring more or less uncertainty?

Energy Policy Uncertainty - More Weight The end of September also marked continued PROCLAIMED uncertainty with regard to energy policy. Interior Secretary Salazar actually released the following statement, “over the coming years you can expect a dynamic regulatory environment as we continue to raise the bar for offshore oil and gas development.” In an industry requiring billions of dollars in investment, introducing that uncertainty is mind boggling. Without clarity of what the regulations are and without drilling leases that can be relied on, expect dependence on foreign oil (and energy prices) to rise significantly. On October 1st, the EPA announced it is developing proposed higher fuel standards for cars, but with scant details. They added more uncertainty with estimates of the standards ranging from 35 MPG to 62 MPG by 2025. Is it coincidence that the drilling and fuel standards announcements were within a week of each other? Although cap and tax looks politically unviable, gasoline prices in the range of $4 to $5 per gallon by 2012 (as John Hofmeister predicted this past week) may not be far off. While, there would be clear winners in the multifamily industry with high gasoline prices, the impact on the overall economy and industry would definitely be negative.

Access to Capital Low interest rates and the GSE’s (Fannie and Freddie) have played pivotal roles in multifamily lending (and value), but can developers rely on these factors in their pro-forma’s in years to come? Is uncertain availability of funds the new normal rather than a brief aberration of the financial crisis? Talk continues about unraveling the GSE’s, but that would involve owning up to the true value of all bad loans – a doubtful scenario. Still, there is a lot of questionable multifamily debt that requires refinancing in the coming few years and a slow market rebound will bring troubled times for some.

Let’s Blame Someone American’s love villains, and Congress took time in September to play to that sentiment by pointing a finger at China. Recent commentary regarding the valuation of the Yuan and the notion that manufacturing would somehow come back to the United States (rather than migrate to other developing countries) if the Yuan was “fairly valued” are perplexing. That door shut long ago when Americans’ determined, for good or bad, the benefits of low cost goods trump the benefits of “buying American”. Don’t look for the cost of Chinese products (there are more of them than you think in new construction) to suddenly jump, although expect a gradual appreciation of a few more points. Keep an eye on the Fed's related attempt to make inflation kick in though.

Tax Rates and the Deficit– Do They Matter? Congress left for recess without deciding what the tax rates would be for next year. By the way, the government fiscal year ends in October. Increasing percentages of tax revenue are used to pay interest on the debt. The problem is getting worse now that the Social Security system needs the Federal Government to start paying back all the money it borrowed from the “Trust Fund” (different than just paying interest). Perception is reality, and tax rates matter for their impact on the American Psyche as well as their direct economic impact. As to the impact of government spending, go back to the discussion of GDP growth and think about the word growth. Government spending simply cannot grow every quarter.

A Final Word The 2010 multifamily vacancy and absorption trends are welcome news for the industry. Real Estate has always been about location first and the conditions, perceptions, and psyche are different for each sub-market. Continued cautious optimism appears to be today’s wisest path. Timing will be key. After laying dormant for most of 2009, in select markets we are starting to see a surge in new construction of A product that is expected to gain steam as more pro-forma hurdles are met. Conversely, many renovations continue to be on hold, so when will we see a significant rise in rehabs? As the concessions burn off and rents tick up in the A product, at what point will adequate returns for specific improvements be possible at existing, older stabilized communities? In the “new normal”, are rehabs more or less risky than new construction and what are appropriate rates of return? These are questions we will explore in a future post.

Fair Housing Lawsuits Continue

In September, the Justice Department filed a lawsuit against Post Properties for failing to comply with the Fair Housing Act. They allege a failure to comply with accessible routes; narrow doors and hallways; kitchens and bathrooms that lack accessible clear floor space; and thermostats that are mounted too high to be accessible to a person using a wheelchair.

The Fair Housing Act applies to buildings first occupied as of March 13, 1991; yet the multifamily industry still suffers from designs that do not follow the guidelines. It is still the exception, rather than the rule, that a set of plans for new apartment construction that I review comply with the Act. The most common errors are bathroom door widths, shower clear floor areas, range clear floor areas, turning circles at U shape kitchens, minimum clearances between opposing counters and refrigerators, and clear floor areas at kitchen sinks. Every developer needs to have thorough reviews of their plans done for Fair Housing Act compliance and not simply rely on the project Architect.

See the Post lawsuit at http://tiny.cc/dnti8

Marketing at Apartment Entries

Drive by is a huge component of leasing traffic in the multifamily industry; yet apartment community signage, entries and curb presentation often look generic, indistinctive, and tired. Significant money is spent marketing multifamily properties, while signage that is potentially viewed by thousands of prospects everyday is left to blend in to the background – weathered, un-refreshed and looking the same way for months and even years. Your efforts should go way beyond periodic replacement of the flowers. Does your multifamily community entry positively contribute to property branding, catch attention and generate prospects the way it should?

1) I always wondered …? If you don’t have the words “apartments” or “rental” in LARGE READABLE FONT at your entrance (preferably on the monument sign) you are throwing away leads by the truckload.
2) Temporary “Now Leasing” signs If your city allows temporary signs, get a permit and put one up. Even if they don’t allow “temporary now leasing signs” they may allow “new management” or “newly renovated” or “special sales event” or some other sign variation you can put up that will draw eyeballs. If there are broker signs on commercial space in your City there should be a way to get a “now leasing” sign approved. If you already have a now leasing sign, think about refreshing it and moving it.
3) Open House signs aren’t just for single family? Many Cities allow bootlegs at least on the weekends or during certain hours. Putting them up and taking them down around town isn’t so bad if you plan for it. People do notice them, because they are just up for a brief period of time they look out of place (a positive thing). Hand written bootlegs with minimal information (2BR/2bath $650/month call 555-333-1212) work too!
3) Who moved my Cheese? Variety catches eyeballs and makes impressions. After driving by a couple of times, people only notice what is new and distinctive – they automatically filter out what they saw before and let it blend in. Tired banners in the same place everyday are not going to attract much attention. Move and change up things – whether it is sandwich boards, bootlegs, temporary leasing signs, flowers, flower pots, tag lines on signs, balloons, banners…move them around and change them. Keep it classy though. If you have more than one property in your portfolio, some of the props can be moved between properties for variety.
4) What the … ? Be different and unconventional to attract eyeballs and develop a sense of community. Talk to local businesses and vendors for “no cost” tie-ins. “Our Next Resident Event” opportunities abound. Plan a resident trip to an NHL hockey game and talk to the team's marketing department about lending you an eye catching display for a week. Park a limo out front for a day if a group is going to a concert, plan a trip to a classic car show and park an antique out front, Christmas in April display...movie night at the pool...you get the idea. Showing off your features or amenities is another option - if you have granite tops in your units, put a slab of granite out (with a sign). If you have a tennis court, talk to your local tennis shop about a promotion (ours has a mobile store they take to events).

Even if your entry design is pathetic and you don't have a budget, there are a lot of cost effective things you can do. Let me know your ideas! I am also working on a series of posts on entry sign design that will include video slide shows. Send me pictures of entry signs at Bfrn84@gmail.com and I’ll try to include them!

Awareness and a “Way Of Being”

A woman walking down a busy street, talking on her cell phone, was oblivious to her surroundings on Saturday. She stepped off the curb to cross seven lanes of traffic, just as the light turned green. The driver in the third lane was not paying attention and barely managed to stop as the pedestrian literally jumped out of the way. Despite being only half way across, the pedestrian continued to hold her phone to her ear, look over her shoulder, and make angry gestures at the driver that almost hit her as she blindly forged ahead. Ignoring the perils in front of her, she was running past moving vehicles while still looking behind her!

The incident spawned thoughts on a number of different levels and inspired me to look up an old article on leadership written by Jack Welch. The former CEO of GE discusses several categories of poor leaders including (among others) the know-it-alls, the distant and disengaged, and the just plain jerks and concludes with, “part of being a lousy leader, no matter what the category, is lack of self-awareness.” Being a good leader starts with self awareness and so does being a happy, successful (insert your own definition of “success”) and responsible person.

We make decisions everyday, which by degrees become habitual and automatic, about whether to respect the interests of others’ and try to add value to their lives (with no thought or expectation of reward) or to be selfish, rude and follow the creed of “self first, self last, anything left self again.” Those decisions become part of you, a way of being, which is insightfully illuminated (positively) in the book by Bob Burg, “The Go-Giver”.

The choice is ours whether to be unaware, preoccupied, self absorbed and angry with the past or forward looking, happy and enlightened to the potential the future may hold. “The more we expand our focus to include others' interests alongside our own, the more securely we build the foundations of our own happiness.” While, this quote is by The Dalai Lama, it is a non-secular universal concept.

So, what lessons did I teach my kids, who witnessed it all and summed it up with “she is an idiot”? It was foolish of her to not be paying attention, rude of her to expect that the world revolves around her, and most importantly sad that she chose to blame others and focus on the past instead of admitting and learning from her mistakes and moving forward in a positive way. Be aware of what is going on around you and be self-aware of how others view you. There are lessons here for everyone - professionally (whether in the multifamily industry or any other) and personally. In case you are wondering - we were not in the third lane. We saw her swaggering down the street when she was still ten feet from the curb.

For related content see Jack Welch article at http://tiny.cc/r6z0f
Dalai Lama video on awareness of inner values at http://tiny.cc/89qh3