Pinnacle’s Rick Graf opines on rent growth, institutional capital and the economic recovery
From its headquarters in Seattle, third-party manager Pinnacle, an American Management Services Company, oversees a portfolio of apartment, office, industrial and retail assets valued at more than $18 billion. The investments managed by Pinnacle for more than 235 institutions, pension funds, private partnerships, foreign investors, sole owners and government housing groups include 175,000 multifamily units: 60,000 are affordable and 22,000 are military units.
Pinnacle is active in more than 250 cities across the United States, Canada and Asia. Originally named Goodman Management Group, the company was founded in 1980 by John Goodman, who currently serves as chairman of the board. Chief Executive Officer Stan Harrelson, CPM, directs Pinnacle’s strategic planning and long-term growth as the company expands further into Asia.
Rick Graf, CPM, is president of Pinnacle. He recently talked to Diana Mosher, editor-in-chief, Multi-Housing News, about the challenges of today’s market and the opportunities that lie ahead.
Where do you see rents going in 2010 and 2011? Are you optimistic about 2012?
Frankly, I think 2010 will be very flat. There may be some isolated locations where we begin to see job growth—a few of the markets in Texas, for example. But I think 2010 is going to be largely like 2009. I think we’ll see very modest job growth later this year, but in most cases it [won’t be until] 2011. And, I don’t think we’ll see any real rent growth until 2011. Next year is when we’ll begin to see concessions decrease and rents begin to increase modestly—I’d say, 1.5 to 2 percent.
But Pinnacle does anticipate a bright future. While 2010 will be challenging, we think that by 2012 the multifamily sector will be a very good place to be. My hope is that job creation will have accelerated, and there will be a sharp demand for multifamily. We’re involved in many different elements of the business. We’ll continue to help our clients and their partners grow their portfolios and take advantage of the opportunities out there.
How do you think institutional capital will react in 2010?
There’s going to be some interest from an acquisitions standpoint, but institutional capital is reacting with caution. There is money to invest, but they’re waiting for the right opportunity—and obviously the right price. Many of our clients are institutional in nature. They are interested in acquiring, but there haven’t been a lot of properties
on the market—and those that have been on
the market haven’t been discounted. There are a lot of distressed assets out there, but there aren’t many that have hit the market yet.
In September 2009, Pinnacle opened a new office in Kansas City. How is the Kansas City market doing? Do you have other new offices planned?
Our Great Plains market—which includes Kansas, Missouri, Iowa, Colorado and Nebraska—has been an “in-between market.” We’ve had smatterings of properties there, but we’ve either run them out of Dallas or Chicago. Late last year we opened an office in Kansas City that services all those markets, and almost immediately we were awarded a very large assignment managing [a portfolio of] workforce housing for the Vail Resorts Company. So that was a very nice add there. Those resort properties are all in the mountains of Colorado, and we service them out of our Colorado office. But they’re overseen by our Kansas City office.
From our standpoint, the growth of our Kansas City market has gone well. We’ve picked up a few other assignments there as well—either in Denver, Colorado Springs or Kansas City proper. However, those markets have the same challenges every other place has. We don’t have any additional offices planned for opening in 2010, but certainly if we see opportunities, we’ll pursue them.
Recently, Ford Motor Company announced a $4 million investment in a Chicago assembly plant that will add 1,200 new jobs. Do you think this will have an effect on the local market?
It’s a rare glimpse of good news in the Midwest. The impact of those jobs and the investment remain to be seen, but generally it’s a positive [development]. We’ve got about 4,000 or 5,000 units in greater Chicagoland and they’re widely dispersed. It’s hard to say if, specifically, any property will benefit, but I think overall it’s a positive sign. And we like Chicago. We think it’s a good place to be. There are obviously differences between the suburbs and downtown, but we think, long-term, it’s a good place to be.
Pinnacle has been investing in technology training and operations. What are the priorities in 2010?
We continue to invest and reinvest in our platform, and technology is a big part of that. We certainly are addressing ways to enhance our data aggregation. As you can imagine, a company of our size has a huge amount of data. [A priority is] how to best have that data easily recovered in the event that there’s a catastrophe. We’re all thinking of those types of things [especially now] given the earthquake and devastation in Haiti.
We’re also [looking at] redundancy in our systems and how to best meet the growing needs of our clients. Some of that is outsourcing. But we’ve also assembled a fine in-house tech team that, in my opinion, is second to none in the industry and can be utilized to enhance the relationship [we have]with our clients.
Former Pizza Hut HR executive Anita Vanderveer has been named vice president of Pinnacle’s human resources department, responsible for managing all employment-related operations. Is it unusual to hire outside the multifamily industry; and will this provide a competitive edge?
If you think about it, there are some very similar characteristics. Pizza Hut is a large company made up of owned, third-party stores with many small business units all over the country. There’s a staff of five to 12 people in a given store, which is similar to our [multifamily] site staff. The characteristics of those staffs is very similar to ours. So it matches up reasonably well. Some of the challenges also match up really well. With over 600 properties and nearly 5,000 associates, it’s a very similar business model. Certainly hiring outside the industry brings in fresh ideas. And we’re confident that will continue to be the case.
Speaking of jobs, has Pinnacle needed to consolidate or downsize in the past year or two? If so, have there been any silver linings or unexpected benefits to the organization?
We’ve certainly scaled back in some areas, and part of that is the result of some efficiencies we’ve created. Some of it is because we very strategically reduced our portfolio. In a couple of cases, we went to the client [and communicated we] thought another provider would be better able to service them. These were [clients] not necessarily helping us meet our core objective of becoming more and more institutional. We had them move their business elsewhere.
In the meantime, how is Pinnacle thriving despite a reduced renter pool and lower occupancy? How does corporate set policy regarding concessions, NOI and running a streamlined operation?
Our revenue streams at the corporate level are largely based on revenue streams at the property level. As revenue streams at properties have decreased though reduced rent or lower occupancy, our revenues as a company have decreased proportionately. But the size of our company enables us to generate some buying power and efficiencies that, frankly, some others don’t have.
In terms of setting rents and concessions and trying to run a streamlined operation, from a property-level perspective, we work hand-in-hand with clients to set strategy and approaches—and those vary from client to client. Regarding concessions, I think most people take the approach (and I would concur) that I’d rather have a person living in the apartment at a reduced rent, rather than having that apartment sitting vacant. When—not if—the market begins to recover, I can then grow that person’s rent rather than having to fill that apartment with a good renter.
And the same thinking applies to operating expenses. I think that at the property level there are ways to streamline operating expenses and—even though revenues are down—to maintain a constant source of NOI for our properties and our clients. This has been easier to do in some cases than others. That’s our challenge, and it’s very much a dynamic tension in today’s environment.
Certainly in our third-party business we work with a lot of lenders and special servicers. They’re getting properties back and need professional management, and that side of our business is growing—and will continue to grow.
Pinnacle has a military housing initiative in the Republic of Korea. Tell us a bit about Pinnacle’s military and global business initiatives.
In general, military bases are privatizing on a very prescribed programmatic schedule. That process alone doesn’t get compromised by the economic downturn. In terms of going out and placing bonds and raising equity for transactions that are large, that becomes more challenging because the capital markets are much more tight. We’re continuing to march forward. We’re well-entrenched in that process and we believe there will be some other military housing opportunities for companies like ours to partake in.
We’ve had our toe in the international waters for some time now. We have an office in Beijing. We’re managing 12 to 15 assets in China. Obviously, the Korea military base strengthens our Asian platform. We have an office in Tokyo, and we’ve been working with some clients/partners trying to understand the U.K. housing market. We’ve been dabbling in the Middle East trying to understand several facilities management opportunities there. We do have a great amount of interest in other business types in other parts of the world. We also recognize it’s challenging to do business in other parts of the world, so we go through a great exercise of caution and due diligence before entering a new market or sector.
What opportunities do you see for multifamily investment overseas? What about for foreign capital investing in American multifamily?
There’s always been some element of it, but it has been such a small sector. Because of our international connections we see an increasing interest, and investors from other countries are coming into our market just to take advantage of what, I think, are some high-quality assets and portfolios that presumably are going to be sold at a discount. We think that’s on the increase. I don’t know that it will ever be a huge percentage of our market, but I certainly think there are some opportunities there. We’re working with a number of off-shore investors who have an interest in investing.
Having recently watched President Obama’s State of the Union address, do you think Washington is doing enough to build the economy?
I don’t think Washington is doing enough. There’s a lot of money committed to being spent, yet in spite of the insistence that the recession is over, it doesn’t feel like it’s over. Until jobs are created in significant quantities, I don’t think enough is being done. I’m sure that other people you talk to would echo this [opinion].