Niche Markets: Covering the Bases
The private firms that operate 95 percent of the housing on the nation’s military installations face a paradox.
The private firms that operate about 95 percent of the housing on the nation’s military installations face a paradox. Under the Department of Defense’s two-decade-old privatization initiative, those operators are investing in upgrades and offering attractive amenity packages tailored to the military families that comprise the vast majority of residents on base. Moreover, on-base housing tends to offer rents that are competitive and often discounted significantly over off-base counterparts.
Yet an estimated 50 percent of military families still prefer to find residences beyond the boundaries of the installation, according to Department of Defense data. Even though this phenomenon reflects historical patterns to some extent, a variety of evolving trends are at work.
To begin with, the lines between on-base and off-base communities are blurring. “More military residents are considering off-base housing because it has become more intertwined now with the community on the base itself,” said Karen Plesh, vice president of operations for Hunt Military Communities, which operates about 52,000 units for the four military branches on more than 40 bases. “Some of that comes from the financial constraints to renovate, whereas in the conventional world they can change the rent prices. Many of these families are just looking for a different style of home.”
Moreover, the market conditions affecting service members’ choices vary widely. Among Hawaii’s 11 bases, for instance, on-base housing is in great demand because pricing comes at a considerable discount to the Aloha State’s notoriously high rents. On the other end of the spectrum, civilian housing prices go head-to-head with their military counterparts near Tennessee’s only installations, Arnold Air Force Base (roughly equidistant from Chattanooga and Nashville) and NSA Mid-South, a Navy facility located about nine miles north of Memphis. That parity tends to reduce the military housing’s built-in advantage with service members.
For private military housing operators, the category offers unique constraints as well as benefits. Launched in 1996, the Military Housing Privatization Initiative provides steady cash flow through 50-year ground leases. That predictability generates the resources needed to make steady, long-term investments in property.
At the same time, the covenants governing the leases carry significant restrictions. Homes of comparable size rent for uniform prices, even though their age and amenities may vary considerably.
Yet the sheer variety of military housing presents its own challenges, both in the competition for residents and for capital programs. Among the 70,000 homes operated by Hunt Military Communities, vintages range from the 1960s to the 1990s. Within installations, neighborhoods are often separated by several miles, noted John Ehle, the company’s president.
“We still have houses that have not been fully replaced after the privatization, so that will make them less desirable than the others that have been updated,” he added. “We have this old-versus-new housing stock, which makes it difficult when the housing prices for both are equal.”
As military families seek out the most freshly upgraded properties and waiting lists lengthen, off-base housing may start looking like a more attractive option. Wait times vary due to the activity during the busy Permanent Change of Station season (PCS) and off season, varying by location and dependent on the families’ flexibility in waiting for a new home to be available, explained Plesh.
As they position their on-base facilities for maximum appeal, operators of military housing portfolios are eyeing complex capital programs. “You need to have a long-term plan and work with each of the services,” said Ronald Hansen, president of Michaels Management Services and Michaels Military Housing, managers of a 16,000-unit portfolio serving 45,000 residents at nine Army bases and two Air Force facilities.
At the moment, Michaels is deep into the planning of its next capital program. The overarching time span that governs the firm’s planning is the 50-year term of ground leases on military installations. The next round of renovations, upgrades and additions will unfold over 10 years, standard for military housing specialists.
“There was a bit of a lull in our building cycle, but now we are constantly watching for new things to include in our plan,” Hansen reported. Michaels is assessing the conditions at the bases, their constituent neighborhoods and individual residences in order to establish the priorities for renovation and expansion.
“We go through every 10 years, and whatever changes we didn’t implement in the first round, we go back and take care of them in the next cycle. The long-range plan goes for 50 years, so at the end, each property can be in the proper shape.”
To counter the pull of off-base product, military housing providers aim to offer services above and beyond what their customers might find outside the base’s borders.
“We plan a lot of social events within our residential living, to help create memories for these families,” Plesh reported. “We’ve done everything from movie nights and dances to building dog parks and providing services to bring the community together. The social aspect of our bases is important to us.”
Above all, she explained, operators strive to create an environment characterized by comfort, normalcy and a sense of community—qualities especially prized by residents, who make large geographic leaps every few years, she explained.
As they upgrade communities through their renovation programs, operators likewise take valuable cues from nearby market-rate properties and even try to outdo them whenever possible. Military housing managers are rolling out a host of amenities. Features that are proving to be a popular draw are LEED certification, energy-efficient appliances, solar panels, recycled hot water systems, bamboo flooring, recycled materials and granite countertops.
“Lots of military families are looking for these open-floor plan designs, efficient lighting, storage, large kitchens, fireplaces, grand entryways, high ceilings,” said Hansen.
“We are looking for newer product with sustainable aspects, ones that will not only look great but also last a long time. We are always looking at the cutting edge to see what should be incorporated.”
Originally appearing in the March 2017 issue of MHN.