Change is Coming
- Nov 30, 2012
Demand for apartments is set to increase dramatically by 2020; compensation in the apartment industry will continue to rise faster than the rate of inflation; hospitality companies may seek to acquire an apartment REIT or privately held multifamily company by 2020; and over 50 percent of today’s senior leadership will pass the baton by 2020.
These are some futuristic predictions from Chris Lee, president and CEO of Los Angeles-based CEL & Associates Inc., a leading real estate consulting firm. Lee has just completed a book, “Transformational Leadership in the New Age of Real Estate,” which is available through the Institute of Real Estate Management. The book lays out the future of real estate and explains the need for executives of the future to be visionary and supportive of individual entrepreneurship.
“The book was driven by my interactions with 500 real estate clients who are continually probing and asking questions about not only the information we have, but also what the information means, what the future holds and how to prepare for the future,” Lee tells MHN. “Business as usual will not guarantee success tomorrow. Leaders have to be transformational in how they approach the company and capture those opportunities.”
While “Transformational Leadership” offers a roadmap to success factors for the future, it also closes with a series of futuristic predictions for real estate. MHN’s Executive Editor Keat Foong asks Lee about his predictions for the apartment industry in several categories of interest. Lee’s forecasts cover the next two real estate cycles over a 10-year period. “The predictions are based on my reading of tons of data from publications and research reports as well as proprietary research conducted by CEL & Associates,” says Lee. CEL & Associates conducts up to 500 interviews per year with leaders across the country. “We analyze [these interviews] and draw conclusions about what they mean and how to look into the future.”
Level of Demand for Apartments…By the year 2020, I expect the number of renters in the U.S. to increase from 34 percent to around 39 to 42 percent. While a portion of those renters will choose single-family homes owned by private equity investors, demand for apartments will dramatically increase. By 2020, the U.S. apartment industry will be in the eye of the perfect storm, [caused by] high consumer and student loan debt, flat to modest household income growth, shifting geo-centric job opportunities, delayed Baby Boomer retirement, reduced discretionary income and the continued shift to new urbanism. During the 2011 to 2020 period, the number of “needed” growth-related housing demand is estimated to be 10.3 million units. Assuming historical demand for apartments (five to 50+ units), the number of [apartment] units [supplied] will be in excess of 1.3 million. I expect real demand would be far in excess of that number. We need to remember that in addition to incremental demand, around two percent or more of today’s apartment units become obsolete each year. If one converted all homeowners currently in or about to enter into foreclosure, the percent of homeowners in the U.S. is below 60 percent. In addition, investors will continue to give apartments a preferred asset class rating.
Most Important Demographic Group…While the under-30-year-old demographic group will dominate, I expect the percent of renter-by-choice to increase in the 30- to 44-year-old group by 2 to 3 percentage points, and the over-65-year-old group to increase from 17 percent to slightly over 21 percent. While demand for senior housing will increase slightly, there will be a significant increase in rental housing for those over 85 years. In addition, the number of single-family homes repossessed (800,000 in 2011 and 700,000 in 2012) will drive a percentage of that consumer group into apartment living.
Renting Behavior… The shift to a more renter-based society will also increase demand for more urban, walkable communities with multiple adjacent assets (e.g. hospitals, entertainment centers, retail and grocery stores, proximity to employment centers, dining facilities, transit centers, educational institutions, and recreation areas). Demand for community identity, sense of place and proximity attributes will guide where-to-rent decisions. Properties that require commuting will not be favored by a growing number of residents who want to simplify their lives, recapture time lost and engage with others “like” themselves.
Apartment Industry’s View of its Product…In the future, there may be more value given to the captured or accessible pool of residents than the replacement cost of the apartment community. The average Facebook user has 229 Facebook Friends. This means that for every 300-unit apartment community, with an estimated occupancy of 1.5, there is potential access to over 100,000 “connective links.” A portfolio of 10,000 units would have over 3,000,000 connective links. Apartment owners will, by 2020, value and place greater emphasis on residents and the resident experience than on just maintaining the property. Apartment firms will have C-Suite level personnel with such titles as: Director of Sponsorships; Director of Social Media; Director of Integrative Technologies; Knowledge Officer; and Director of Lifestyle and Resident Services. The apartment industry will likely be using pre-fab construction and added design features amid convertibility and work/life balance. By 2020, the product will be supportive of, not driving, the desired branding and lifestyle experience. Psychographics will replace demographics in product design and marketability. Integrative and active websites and property portals will be the gateways to tomorrow’s product. By the end of the decade, I expect some apartment companies will shift to become “social” or “lifestyle” enterprises with branding that is more aligned with the experienced brand image of Apple or Facebook than their competitors.
Apartment Branding…There will be an increasing emphasis on company, community, service and experience branding. Look for the addition of co-branding strategies with hospitality companies, celebrities or corporations that appeal to the 18- to 34-year-old demographic and complementary entities. Branding will be more of a “renters’ voice” or experience than a fixed product or location. Some apartment communities may be aligned with industries, work or religious groups or commonality (e.g. retired military, college alumni, etc.). Apartment communities will feature such branding themes as no smoking, pet friendly and environmentally responsible.
Apartment Lease Structures…Apartment leases by 2020 will be “purchased” by units/length of stay (i.e. the longer the rental term, the less the monthly rent). For national owners and operators, apartment leases will be portable. Leasing will be increasingly completed online and prospective residents will rely more upon online ratings, virtual tours and lease streamlining options. I expect residents by 2020 will have multiple levels of “service options” when leasing (e.g. platinum, gold, silver service, etc.), and most residents in the future will garner “points” based on the amount of rent paid (i.e. a convertible rewards program).
Apartment Amenities… By 2020 watch for: exterior windows to become computer screens; wall-mounted refrigerators; self-cleaning closets; room technology that monitors vital signs; sophisticated energy efficiency controls; digital wall art/pictures; and control switches that can be activated by your computer or PDA. Apartment communities will have more demonstration kitchen areas, an honor-based convenience store product area, shared media and entertainment areas, rooftop amenities, and moveable walls for just-in-time room configuration. The use of environmentally friendly products will dominate interior finishes and amenities.
Property Management…The biggest change in how apartment companies approach onsite management will be the shift from process-driven to outcome-driven business practices. The term Resident Share will emerge as apartment operators seek to capture more of the residents’ “lifestyle expenditures.” Electronic monitoring of equipment will be done from afar. Training and certification will be a commonplace requirement. A community ombudsman will be a feature within many apartment properties. Staffing will become more “design-day”oriented. Design-day is a term used in the attractions industry to move staff to where the people are; thus, the apartment industry will likely be changing the hours of “visible” staff to provide greater resident contact opportunities and service. Over 50 percent of today’s senior leadership will turn over by 2020 and a new wave of Gen Y leaders will take hold with new ideas and new ways of creating valued resident relationships.
New Areas Of Operations…There will be limited new areas of operations for apartment companies by 2020. I expect many apartment operators will add a single-family rental division, and there will be a surge in management joint ventures with healthcare facilities. However, the primary focus until 2020 will be on core and adjacency businesses and business lines.
Architectural Design…New and value-added renovations in the apartment industry will continue their green/sustainable design focus. However, the biggest change will not be in design—it will be in the products used (more modular and environmentally friendly). Computer-driven construction technologies and use of the “entire” building/grounds will be the mandate to architects.
Multifamily Labor Market…While I expect apartment industry employment growth to be incremental (i.e. the addition of more units), the biggest employment opportunity will come from a wave of retiring Baby Boomer-aged employees. The void left by their departure could create between 75,000 and 100,000 employment opportunities over the next decade. Compensation will continue to rise faster than the rate of inflation, and I expect more apartment companies to extend their long-term incentive programs to a larger group of employees.
Staff Training… Gone will be the “feel good” trainers as apartment companies switch to online, interactive training based on coaching and mentorship principles. While company-sponsored conferences, webinars and annual meetings will continue to be held, the shift to personal learning—utilizing highly integrated Web portals that create formal and informal training venues for all stakeholders—will emerge. Watch for companies to incorporate vendors into training programs. Growth in “gamification” of training will accelerate by the end of the decade.
Apartment Acquisitions…By 2020, watch for one or more hospitality companies to acquire or seek to acquire a national apartment REIT or a large privately held multifamily company. Marriott, Starwood, Hyatt and perhaps others will seek to leverage their brand in a sector that “just has a longer length of stay.” I expect to see an acceleration in international acquisitions (Canada and Europe) as global capital seeks a global platform.
Consolidation of Multifamily Companies…Over the next decade, we will see a dramatic increase in the consolidation of apartment owners and operators. Legacy founders seeking to monetize their companies will pursue entity sales. Those unable to find a stable source of growth capital will seek strategic alternatives. Scaling and operational efficiencies will motivate others to sell.
Concluding Comments…The future of the apartment industry is not just bright—it is glowing. The combination of pent-up demand, demographic growth, aging stock, new urbanism and a shift to a more renter-based society will drive growth in this sector. The key to success for those in the apartment industry will not be “showing up,” but rather “living up,” to the potentials within one of America’s most dynamic real estate segments.
Christopher Lee is president and CEO of Los Angeles-based CEL & Associates Inc. Lee’s new book, Transformational Leadership In The New Age Of Real Estate, is now available through IREM. Visit CEL & Associates Inc.’s website (www.celassociates.com) or contact Lee directly by calling 310.571.3113, or via email to firstname.lastname@example.org.