Apartment Investment

Regardless of our role within an organization, we will be asked throughout our careers to participate in, lead or evaluate various corporate initiatives. After all, most of what a company really ‘is’ is a series of interrelated initiatives.  These could range from the acts of sales, operations, marketing, and acquisitions to finding efficiencies, fixing problems launching new products, etc. Generally we would like to succeed in whatever initiatives we are involved. And hopefully we have positioned ourselves for success through our understanding and expertise, our dedication and will to succeed, and our preparation and focus. Additionally we may have benefited from multiple books, papers and degrees which exist to provide us tools or help train us to succeed at whatever task we undertake. But invariably, there will be times when success is not an option or when we fail after seemingly doing all of the ‘right’ things. In those cases what do we do?

Our next step should be to perform a postmortem. Think of the postmortem as a forensic analysis of the results of the initiative. Admittedly, the specifics of every project are going to be different. But if we were to approach each postmortem as its own totally unique situation, then it would virtually be impossible to be efficient in our analysis. Over time, we also need the ability to connect the information that we gain to make better future decisions. This is the exact same process that our minds go through as the act of learning. The problem with our mind is that it does not always evaluate the information clearly and unemotionally. That is why we must take a scientific approach to the data and performing our analysis.

No matter what our role is within the multi-family industry, there is always one word which is used more than any other; “community.” Some of us own communities, some of us develop communities, some of us design communities and others of us lease or operate them. And chances are that many of us live in an apartment, condominium or townhome community as well. So then why is it that there is so little ‘community’ in our communities?

When it comes down to this failure’s root cause, it can really only be one of two choices;

a.       Either the management team does not expend their energies in a manner that creates a welcoming and vibrant atmosphere that encourages interaction, or

Let me begin by wishing you all a very Merry Christmas and Happy Hanukkah. For those of you who regularly read my scribbles, you are used to some pretty meaty topics. In light of the Holidays, this one will be a bit frothier. In each blog that I write there are certain themes which remain pretty consistent. One of my favorites is that real estate development is about the coolest industry on the planet. After all, our job is to make the world a better, more usable, more beautiful place.

Often my intended audience is the real estate developer (my hope is of course that there is some part of my subject matter which translates to my non-developer audience- or at least helps you better understand those temperamental developers who constantly tell you ‘We can’t afford that.’). Today, I would like to remind us all of something that is very easily glossed over as we perform our day-to-day tasks.

Not long ago, I toured an apartment complex with two friends; one was the architect who designed it and the other, the developer who built and owns it. The exterior was gorgeous and appropriate. The amenities were unique and clever. The units appeared to be attractive and reasonable for the market…that is until we entered the kitchen. This room was comprised of dark hardwood floors, rich wood cabinetry, stainless appliances and a builder-grade white laminate counter (that stuck out like a sore thumb). I winced. I looked to my architect friend- who gave me the ‘this isn’t the time’ slight head shake. We continued the tour. 

Later, I took the architect aside and asked ‘What the f@*k was that?’ He explained that there were originally granite counters spec’ed, but that they were lost in the V.E. process. To me, this was yet another example of the bad results of not training our young developers to know the difference between a good and a bad decision. It’s the problem of not teaching them that development happens in the real world- not on a spreadsheet. Which brings me to our theme;

‘Whenever there is a decision, there is always a good decision to be made.’

For value investors, Demand, Supply and the Cost of Acquisition are the three factors affecting the apartment building investment decision and all are saying the time to buy is now.  There is a tidal wave of new renters coming into the market and there has been little apartment construction to meet this growing demand. Outside of the gateway cities the prices of existing apartment buildings remain below the cost of building new.  Fixed rate financing is available for apartment buildings at rates lower than we will see again for years if not decades.

“The multifamily sector is probably the only commercial real estate sector that has very positive fundamentals behind it,” said Jeffrey Baker, managing director at Savills LLC, a real estate investment bank that raises capital for multifamily owners and developers. “You’ve got a demographic that is producing more households that want to rent an apartment. You’ve got virtually no new supply that’s been added over the last several years.”¹

Demand = DEMOGRAPHICS

Why You Need to Consider Multifamily Real Estate Investment Properties.

When comparing different real estate investment options, it is important to look at key factors in addition to just the income they produce and the purchase price.  When looking at different real estate investment options, our team likes to invest in properties that fill a profoundly necessary need that will always be in demand, and that need is shelter. 

Commercial real estate properties containing businesses (retail and office) have been declining every year. Businesses continue to have a variety of options available to them for locating their businesses. Their businesses can be located in an office building or in the basement of a home, or they can even use technology to make their businesses virtual, requiring a minimum of space. Businesses can store files in a warehouse, in the cloud, or on a thumb drive. They can stockpile large inventories or stay lean and order as needed. It is all reflected in the cost to run the business and affects the amount of space they need. My wife's employer is based in Texas and over 50% of their employees work from home, and connecting online. The internet has created less demand for retail space as consumers no longer have to rely on companies down the road to purchase goods and services.  They now have virtual stores they can shop from and have their purchases delivered right to their doors diminishing the need for retail space.  Companies are always scrutinizing the use of real estate and facilities as a way of improving the bottom line.

I have been fortunate to have the occasion to work with a group of promising young folks and get to hear their hopes and expectations. As I listen, I can’t help but think back to my own career path and chuckle at how little changes generationally. Their wants are no different than mine were at their age. Their frustrations that it all happens too slowly are the same. Their fundamental lack of understanding is heartwarming, as are their expectations.

 Since early in our careers, those of us who are smart, hard-working and motivated have generally focused on the idea of ownership. We see the entrepreneurs who employ us and want to be similar. They embody a version of our concept of success. When we are young, being a partner means having a seat at the grown-ups table. It’s our opportunity to affect change or enable our visions. It’s the gateway to profit and security. There may even be a little pride in the title of ‘owner’ which we covet- if we’re confident enough to admit it.

But because we are smart, hard-working and motivated; we also want things well before we’re ready for them, before we even understand what it is that we think we want. Of course we don’t recognize that we’re not ready; after all we have been told that we are bright and unique snowflakes since we were three years old. So I thought that I might offer some ‘tough love’ advice and words of wisdom to the throngs of audacious talented youth, who will one day, be ready to lead.