Q&A With ROSS Cos. Co-founders, Scott and Beth Ross
MHN checked in with the ROSS Cos. tag team to discuss what's coming up for multifamily in 2016 and how the company plans to expand its expertise.
Founded in 1983, Bethesda, Md.-based ROSS Cos. was the vision of Scott and Beth Ross, with the goal of becoming a leading owner, operator and renovator of multifamily assets in the Mid-Atlantic region area. Today, the company is a local authority on all things multifamily, with its three affiliates—ROSS Development & Investment (RDI), ROSS Management Services (RMS) and ROSS Renovation & Construction (RRC). This combination allows ROSS Cos. to provide its investment partners with numerous benefits, including, property management services, operating efficiencies, cost savings, expertise in renovation and construction, development, asset management and marketing. In addition to being co-founders, Scott Ross is the president of RDI and the chairman & president of RRC, while Beth is the president of RMS.
As we head into 2016, MHN got a chance to catch up with the ROSS Cos. duo to see what’s in store for multifamily in 2016 and how the company adjusts to the continuously evolving state of the industry.
MHN: What are some of ROSS’s priorities or its strategy for multifamily in 2016, and how do these priorities differ from those in 2015?
Scott: Historically, our company has been more focused on acquisitions and multifamily property management than multifamily development. This year, just as in 2015, we will be very cautious about starting new development in our primary market, the Washington, D.C., metropolitan area, because of the oversupply of new communities. These new communities are in fact seeing declines in their rents and are offering concessions. In a couple of years, this will all reverse because of how strong absorption has been and will continue to be in the D.C. metro market.
In the meantime, we will look to continue to acquire existing communities that are underperforming and in which we can significantly improve the performance.
MHN: Are there any particular markets or submarkets that ROSS is looking to expand into? If so, why are you interested in those markets?
Beth: As we have since our founding more than 30 years ago, we will continue in 2016 and beyond to focus our efforts on acquiring, developing, managing and renovating apartment communities in the Mid-Atlantic region, especially the Washington, D.C., metropolitan area.
Our primary focus has been the D.C. area, but in 2015 we opened an office in Richmond, Va., to expand our property management expertise into the Mid-Atlantic region. We’ve already begun taking over management responsibilities for several communities in Richmond and North Carolina, markets in which we have an interest because of their strong job growth, significant supply of undermanaged apartment communities and unique historic assets. As a third-party manager in these new markets, our expansion revolves around having expertise in a market to ensure we maximize revenue and NOI versus the competition and deliver what residents in those markets want. We’re excited about our expansion opportunities in these and other markets in the Mid-Atlantic region.
MHN: Apartment rent growth has been strong recently. What do you think has contributed to this trend and do you expect it to continue?
Scott: The vast majority of multifamily communities in the Washington, D.C., metropolitan area, especially the Class B properties that lie at the heart of our owned and management portfolios, have experienced solid rent growth over the past several years, and we certainly expect that to continue. The new Class A deliveries are experiencing some rent softening, but that’s a very finite segment of the market, and that too should change as those units are absorbed.
The rental growth in metro D.C. has been fueled by a very strong economy. The Washington metro area added approximately 68,500 new jobs last year. Washington, D.C., continually gets a black eye in the media, but that’s unfounded. The multifamily sector has really benefitted from the strength of the area’s employment base, which has transitioned from being solely government to government, technology and service support for things related to existing and proposed regulations.
MHN: Which demographics seem to be contributing to the strong growth of the apartment sector?
Beth: The demand for apartment living is not limited to a single demographic. We hear a lot about Millennials, but baby boomers, Gen X’ers and members of Generation Z are renting in significant numbers. Each individual renter has his or her own reasons for choosing to live where they do, but broadly speaking, people either simply prefer the ease and flexibility of multifamily living, can’t afford to buy a new home with the stringent down-payment requirements and other rigorous standards, or both.
MHN: What are some challenges coming up in the multifamily sector? Are there any supply/demand or pricing risks?
Scott: With regards to D.C., we’re seeing an oversupply in the short run of new high-rent Class A units with small square footage. But more broadly speaking, we’re seeing a fundamental change in living patterns in this country, and people are moving away from home ownership. This run that the apartment sector is on has a long way to go. The demographics show that and the statistics support that.
Now, as for challenges, affordable housing is an enormous one. The ability to create it, either through the construction of new communities or the renovation and modification of existing ones, is by far the biggest challenge the multifamily sector now has and will continue to have.
MHN: Which asset classes or property types are showing the strongest performance and which offer the best investment opportunities?
Beth: On a performance basis, the middle of the market, the Class B assets, are performing very strongly in the Mid-Atlantic, and we feel that they offer the strongest investment opportunities.
Investors are buying Class A communities at very low returns, but their reason for buying them is 1) they’re usually new, 2) they will often be holding them for a long time and 3) they may convert them to condominiums in the future. Their investment incentives are completely different than seeking immediate revenue returns or yields.
We’re buying Class B communities and improving them for about 50 percent of the cost of a new delivery, and our rents, while not as high as those in Class A properties, provide us with good returns on a regular basis, year after year. Even modest rent growth provides an enormous benefit to the bottom line. There are so many opportunities to renovate and reposition an asset in the Class B space.
MHN: Are there any property types that developers seem particularly interested in creating or any markets that are particularly popular as of late?
Beth: A lot of developers are interested in creating mixed-use communities featuring small units, located near public transportation and in vibrant intown areas. It’s a great product type, but these kinds of developments are hard to structure because they involve more than one type of real estate.
When it comes to newer, smaller intown units and mixed-use properties, one of the questions is, “Will there be a constant flow of youthful energy to live in these kinds of units and environments?” At some point, the current residents are going to make a life change, get married, have kids and move out for more space. One of the comments we hear a lot is, “Older folks are going to move in there in their place.” Well, for an older couple to move into those units, you’d have to combine two or three of them to make a reasonable square footage.
MHN: What’s your take on the need for affordable housing in the U.S.?
Scott: It’s the biggest crisis facing the apartment industry. Our firm is committed to highlighting the issue and pushing for solutions.
As a member of the National Multifamily Housing Council’s Workforce Housing Affordability Committee, I’ve spoken with several colleagues on the committee about how we’re not supplying housing at the right price point for people who desperately need it, and with the programs and the systems that we have today, creating that product is a real challenge.
Our firm has had some success in this regard, but we’re talking about hundreds of thousands of units of demand that are not being satisfied in any one city. I think the unmet demand for affordable housing totals six million units across the country.