Finishing Touches Seal the Deal
- Jul 29, 2010
By Paul Rosta, Contributing Editor
The sight of dogs romping in spacious green expanses is familiar to residents of multifamily properties around the country. Popular with residents and inexpensive to maintain, the pet-friendly perk represents a popular, cost-effective amenity. Yet amenities have a much broader role as operators continue to seek an edge in an increasingly competitive environment.
Although the national apartment vacancy rate is projected to drop 30 basis points to 7.8 percent in 2010, asking rents will nevertheless slip 1.7 percent and effective rents will drop 3 percent, according to Marcus & Millichap Real Estate Investment Services Inc.’s national apartment market forecast.
In an industry still struggling with adverse conditions in most of the country, amenities may well seal the deal with a resident. Using amenities effectively calls for strategic thinking about what will best attract and retain residents, rather than merely picking out features at random. “Anyone can throw in a dog run, but what’s the overall experience like?” asks Heather Campbell, director of marketing for Denver-based RedPeak Properties Inc.
Operators of market-rate and affordable properties alike confirm that cannily selected amenities are making their properties more competitive. Careful selection of amenities has reduced the drain on occupancy during the recession, contends Michael Costa, president and CEO of MacFarlane Costa Housing Partners, a Gardena, Calif.-based affordable apartment developer that operates some 27,000 affordable units nationwide. California, in particular, bears out Costa’s point. Occupancy in MacFarlane Costa’s 13,000-unit California portfolio stands at around 94.5 percent today, representing a decline of only 1 to 2 percent from peak market levels. Costa credits the investment in features like extensive public space, Internet connections in all new development, outdoor play areas for children and barbecues with helping to hold the line on occupancy. “We make sure we’re developing at a quality that’s at—or will exceed—the market level,” he says.
Amenities are often intended to move multifamily properties from communities in name to communities in fact. MacFarlane Costa incorporates gathering places tailored to meet the specific needs of residents who often face significant financial and personal challenges. At each of the 135 projects the company owns and operates in California, for example, the company partners with local non-profit community service organizations. As a service to the many working single mothers in their communities, the company provides space, at nominal cost, to day-care operators. “It is a huge draw for our communities, especially for single moms who have kids,” Costa says. MacFarlane Costa’s properties provide ample space for a variety of other activities and services, ranging from tutoring students to seminars on financial matters and computer lessons for senior citizens.
Features that enhance residents’ social life also guide the selection of amenities at upscale properties. Creating attractive social spaces has paid off handsomely for RedPeak Properties in transforming a 1960s-vintage, 31-story office tower at 1600 Glenarm Place in downtown Denver into a high-rise apartment community. Completed in 2006, the 333-unit property includes a 24-hour fitness center, a media room and an Internet café where residents can borrow a laptop computer in an invitingly hip atmosphere. The experience, Campbell says, is “almost like hanging out at a Starbucks.” Such features help make occupancy and rental price points at 1600 Glenarm competitive with downtown Denver’s newer high-end multifamily product, bearing out the principle that “If you do it right, they will come,” she adds. And at a new project nearby, the $55 million expansion of The Seasons at Cherry Creek, RedPeak Properties is touting sustainability to go along with granite countertops and other standard luxury features. The 148 new units will include a battery of green features, including Energy Star-certified appliances, energy-efficient doors and windows, programmable thermostats, recycling and ample use of natural light.
A nuanced understanding of a property’s target audience also characterizes effective use of amenities. An unusual adaptive reuse project in San Francisco opening this summer is emerging as a model for a strategic approach to amenities. Forest City Residential’s Presidio Landmark is a $75 million reinvention of a 78-year-old, 220,000-square-foot hospital building in the Presidio, a national park and former Army base. (For more about this project, see the San Francisco Market Report on page 27.)
The Presidio Landmark’s approach to amenities at the 154-unit property flows directly from its marketing strategy. The project’s size—small by Forest City Residential standards—and unusual setting allowed the firm to focus on two specific groups: empty-nesters and avid amateur athletes. “Rather than going after everyone in San Francisco, we were going after those two groups in a way that’s uncommon, that they haven’t seen in a rental,” explains Scott Villani, Forest City Residential’s director of marketing. In developing the amenities, Forest City Residential also took a page from the hospitality business. Most hotel operators tend to build a checklist based on standard offerings of comparable properties. By contrast, “The boutique hotels don’t check the boxes,” Villani says. “They do interesting things that their customers want.”
With that in mind, Forest City Residential set out to provide experiences reminiscent of what empty-nesters enjoyed in single-family homes. To supplement the units, which range in size from 550 square feet for a one-bedroom, one-bathroom unit to 1,500 square feet for a two-bedroom, two-bathroom apartment, Presidio Landmark offers storage areas of approximately seven feet tall and four feet deep. On the assumption that many empty-nesters were used to entertaining large groups, Forest City built in social spaces that are intended to function as extensions of the residents’ units. Residents who want to host parties can reserve a 2,000-square-foot entertaining area, which incorporates a lounge, catering kitchen and a dining area. Completing the package, the Presidio Landmark’s amenities also include a wine cellar outfitted with lockers.
Another set of features at the Presidio Landmark is tailored to the fitness buffs that constitute the property’s other target market. The property does include a well-equipped workout room, but its more unusual features provide not only ample storage area for bicyclists, but also a workshop for residents who like to fix their own bikes.
As the demand for luxury rentals gradually rebounds over the next few years, developers and operators of high-end properties will be able to justify the investment in amenities. For those building affordable communities, however, making that investment pencil out poses a different challenge.
MacFarlane Costa, for example, spends an extra five to 10 percent premium on amenities, yet developers of affordable properties must abide by limits on rental pricing in order for the projects to qualify for tax credits. As a result, the additional investment doesn’t yield a dollar-for-dollar return in the short-term. Costa acknowledges that spending money on amenities takes a bite out of the company’s upfront development fee.
For MacFarlane Costa, the cost premium makes sense, though, because amenities are regarded as a long-term investment. Since the company is a long-term owner as well as a developer, development fees account for only part of its revenue. Whatever MacFarlane Costa gives up in a lower income from development, the firm more than recoups through the property’s ability to maintain higher occupancy over the long run. Investing in amenities also pays off in the competition for tax-credit investors. As Costa points out, the affordable tax-credit environment today is a buyer’s market; only about $4.5 billion of prospective investors are chasing $9 billion in tax credits nationwide.
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