Riding Out the Storm

By Keat Foong, Executive EditorThese are tough times, and they may get even tougher. Executives at several of the most time-tested apartment companies share strategies on a range of topics—from the importance of technology and customer service to finding hidden opportunities created by the downturn. Associated Estates Realty Corp. Jeffrey Friedman/President and CEOAssociated Estates Realty Corp. currently owns and/or manages 13,192 units located in high barrier-to-entry submarkets in nine states. The REIT, which is headquartered in Richmond Heights, Ohio, a suburb of Cleveland, has been in the apartment development and management business for more than 30 years. Associated Estates’ portfolio is mostly located in the Midwest, primarily in Michigan and Ohio. However, it started expanding during the mid- to late-1990s into new markets. How is your company being affected by the current economic and financial crises? The broader economic concerns are making it more difficult to increase rents and are creating downward pressure on occupancy in most of our markets. What is different this time around is that we have historically low new-rental construction starts, and the demographics that impact household formation are at all-time highs. We expect the lack of new supply and the positive demographic trends to result in a more rapid recovery. How are you dealing with these challenges? We have always prided ourselves on the importance of extraordinary service. By focusing on resident satisfaction, we are able to retain residents who would otherwise consider relocating. Over 50 percent of our new residents come to us through the Internet, so we continue to prioritize this technology by making the experience as customer-friendly and convenient as possible.What is your current strategy for buying or selling multifamily, including distressed, assets? Over the last few years, we have methodically gone about the process of selling certain Midwest assets and growing in the Mid-Atlantic and Southeast. With nearly 45 percent of our property-level NOI coming from the Mid-Atlantic and Southeast, we would expect to continue to sell a few more Midwest properties. Currently, there’s not much distressed rental apartment product. However, we expect the situation to begin to change over the next six to eight months as owners are unable to refinance properties. The Bozzuto Group Tom Bozzuto/Co-Founder and CEOThe Bozzuto Group covers the spectrum of real estate services through its six companies: Acquisitions, Construction, Development, Homebuilding, Land Development and Property Management. Headquartered in Greenbelt, Md., The Bozzuto Group currently has more than 1,900 rental units in the pipeline or under construction throughout the Mid-Atlantic and Northeast. Since 1988, the company has developed, acquired and built more than 31,000 homes and apartments. How is your company being affected by the current economic and financial crises? The economic climate has affected different parts of our company in different ways. It has created challenges for our development and acquisitions activities, given the difficulties in securing financing, and it has created opportunities for our third-party management and construction businesses.How are you dealing with these challenges? First, we are staying liquid and working hard to maintain our relationships, particularly with our financial partners and lenders. Secondly, we are pursuing opportunities we believe are created by this environment. What is your strategy for buying or selling multifamily assets? Capital that we have used to purchase properties over the past few years is very hesitant to invest at the moment, so we have not bought anything in over a year. Similarly, we believe everyone else’s capital is impacted, except for those looking for a bargain. Consequently, we haven’t sold anything in almost a year. Legacy Partners Residential Inc. W. Dean Henry/President One of the largest apartment companies in the nation, Legacy Partners Residential acquires, develops and manages a portfolio valued at more than $6.3 billion. The 40-year-old company’s expertise includes property acquisition, development, financing, marketing, and property and asset management. From its roots in Northern Calif., Legacy’s portfolio now extends to Southern Calif., Ariz., Colo., Wash. and Texas, and it has a number of high-profile residential developments underway in Calif., Seattle and Texas. How is your company being affected by the current economic and financial crises? Every company and every person in America is affected in some manner by the crises, our company included. There is little need for new multifamily product in our markets because there are no new jobs to support new development. We must also be aware of the effect of the shadow market, the doubling up that occurs in times like this, and job losses. In terms of sales, during 2008 our business plan called for selling about $550 million of multifamily projects. We sold none because 2008 became a buyers’ market, and, since we were under no pressure to sell, we elected to hold onto the assets in hopes of selling into a more favorable market.How are you dealing with these challenges? We’re looking forward strategically, and we’re selectively trimming our overhead to reflect the realities of the next few years and the opportunities beyond. We have reduced our payroll by about 30 percent in the past six months in an effort to evolve back into a property and asset management company and exit the development acquisition model we have pursued for the past 10-15 years. I believe we will be more profitable as a result.What is your strategy for buying or selling?We are fortunate to have about $750 million of multifamily projects under construction in three states. Of course, these were financed several years ago when the financial markets were much different. What we have under construction today will help support our company for the next few years. However, I believe when those projects are completed over the next 12-15 months, there will be very little new construction of multifamily assets until 2011 or 2012. In the meanwhile, we are selectively pursuing the purchase of value-add, core or distressed properties. We think there are some select assets whose value might be bumping along the bottom of the trough.