1998 was a bumpy year for some companies, and for others, it was the ride of their lives. National Real Estate Investor asked some of the multifamily industry's gurus to let us in on the year's biggest deals, disappointments and major trends as well as predict what they expect for 1999.
Jonathan Kempner, president of the National Multi Housing Council, gave his overall view of the industry.
MM: What were some of the "deals of the year?"
Kempner: AIMCO's acquisition of Insignia's apartment portfolio made AIMCO the largest apartment owner and manager in the country. Clearly, this deal will go down in the history books. Also, Trammell Crow Residential's downsizing, cashing out and avowed future rebuilding was an intriguing business strategy, as was the amicable divorce of Lincoln Property Co. and Legacy Partners.
MM: What were some of the main events that occurred within the industry in 1998?
Kempner: On the regulatory front, the NMHC, American Seniors Housing Association (ASHA) and National Apartment Association (NAA) Joint Legislative Program turned back an attempt by the U.S. Department of Housing and Urban Development (HUD) to eliminate the residential occupancy standards used by the apartment industry. As a result of the NMHC/ASHA/NAA action, Congress has required HUD to clarify its policy on reasonable occupancy standards by specifying that two persons per bedroom is generally a reasonable standard.
On the business side, the stability of the apartment market (relative to other property types) during the CMBS turmoil was noteworthy, as was the sudden reversal of fortune for Nomura's Capital America. It was also the year of Revenge of the Private Players, as pension funds and other non-REITs were once again competitive with REITs due to the latter's bumps in the equity and debt markets.
The Federal Communications Commission's (FCC) issuance of regulations concerning the placement of resident satellites on apartment premises was certainly a significant event. Under the final rule, owners may prohibit satellite placement on outside walls, roofs, window sills and all common areas, including common balconies and stairwells. However, owners may not unreasonably restrict residents from having a satellite dish on premises that are within the leasehold and under the exclusive use or control of the viewer, such as a balcony, balcony railings, terraces, patios or gardens. While the ruling represents a partial victory for the apartment industry, NMHC/ASHA/NAA will be appealing the order in the Federal Courts on the basis that the FCC does not have authority in this area and that the order deprives building owners of their constitutionally protected private property rights.
1998 was also the year of the Real Estate Summit on Capitol Hill, spearheaded by NMHC/ASHA/NAA in conjunction with the National Real Estate Organizations (NREO). Through the Summit we were able to improve the understanding policy makers have of real estate's vital contributions to the economy and to local communities. NMHC/ASHA/NAA was also instrumental in the formation of a new bipartisan Congressional Real Estate Caucus, which will provide real estate with a strong, unified voice in the legislative process.
MM: What were some of the general trends you saw throughout the year?
Kempner: In the property market, attention among investors shifted a bit away from A properties toward Bs and Cs. At the same time, there was increased interest in niche markets, including student housing, seniors housing and in-town, upscale apartments in traditional neighborhoods.
The consolidation trend that continued in 1998 has led to increased professionalization among today's property managers and owners. Technology continued to significantly impact the apartment management industry in 1998, with the Internet becoming integral as a renter utility and a competitive advantage for management.
The capital crisis in September changed the whole tenor of the "REIT-is-the-only-way-to-go" thinking that had been prevalent. Along the same lines, the increased partnering through joint ventures or other strategic alliances that the REITs turned to for both development and acquisitions was significant.
MM: What do you see for the multifamily market this year?
Kempner: Finally, once again, as in recent years, the apartment industry avoided widespread overbuilding. While we have been building a little more than we need in certain local markets, I think it is fair to say that the national apartment market is nearly in equilibrium.
Michael Costa of Kaufman & Broad Multi-Housing Group offered his views on the industry and the growth in his company.
MM: How did your company fare in 1998:
Costa: The past year represented a period of dramatic growth for us and was our best year since the division was created in 1994.
MM: What were some of your successes:
Costa: Our completed units rose 187% to 2,317 from 807 in the previous year, and we expect to deliver an even greater number of units in 1999. More importantly, we expanded to several new markets across the country and opened branch offices in Texas and North Carolina to support that expansion. We expect to open additional offices nationwide during the coming year.
MM: Which other areas in the industry had a good 1998?
Costa: The tax credit apartment industry was strong, and for those with the required financial clout and development savvy, we expect it to remain that way, particularly in the senior housing category.
MM: What were/are some of the downsides of the industry?
Costa: One is with the strength of the tax credit apartment industry, which is greater competition for tax credit allocations.
Many worthwhile and needed projects are being held back because in many states, there simply aren't enough credits to go around. The problem is especially acute in California where we're hopeful that the current lottery system will be revised not only to make sure more developers get their credits, but to ensure that the maximum amount of quality affordable housing is being built in markets where it is most needed.
MM: What is the outlook for 1999?
Costa: One industry goal for 1998 was to get Congress to increase both the tax-exempt bond allocation cap and the amount of credits allocated every year. Even though we had support from from both the House and the Senate on those increases, we were unable to accomplish the goal in 1998 and hope to try again this year. However, we were successful in increasing the tax-exempt bond allocation cap. That is a very positive development for the industry because it means an increase in the amount of tax-exempt bonds available to affordable housing from $1.25 per capita to $1.75 over the next four years.
Howard Levine, president of ARCS Commercial Mortgage, comments on how his company did in 1998. You can read more about ARCS in the feature on Page 10.
MM: What were some of the year's most significant events for ARCS?
Levine: 1998 was a pivotal year for us. Our production doubled, Fannie Mae was recognized as the premier source of financing by the real estate world in general.
MM: How did your company change?
Levine: The type of product and borrower changed in 1998 from small to giant. It is now not unusual for us to handle more than $100 million in portfolios in less than a 30-day time frame.
MM: What were some of your company's disappointments?
Levine: We saw the shortcomings of the capital markets. Historically there was a euphoria that anything could get done through a conduit vehicle, but the rubber band was stretched too hard and broke.
MM: What is your outlook for 1999?
Levine: We are concentrating on voids in the market, such as smaller loans at competitive rates. For us, we see the affordable housing arena as an important supplier of new housing, and we have been a major player for three years. We are the only Fannie Mae approved lender with a separate multifamily division.
I see acceleration and record business for us again because of the differentiation of lenders and more sophisticated borrowers. There is more of a normalcy in the market today. To survive through the millennium, you must be well capitalized and understand risks. It is a more sophisticated market today with new ways of structuring the financing. People are going to have to stand up to their credibility because borrowers will look to a company's track record before they make a move.