Three years ago Anthony Rossi Sr., president of Chicago-based RMK Management Corp., noticed a growing number of residents vacating the more than 6,000 apartments his firm manages in the greater Chicago and Minneapolis areas. “Then 2002 and 2003 were like a floodgate opening,” Rossi recalls.
The majority of tenants leaving RMK's communities were purchasing single-family homes. While RMK has historically lost 20% to 25% of its residents to home buying each year, that turnover rate has nearly doubled to between 35% and 40%, Rossi says.
Many departing tenants have been lured by low mortgage rates, which fell from 8.22% for a 30-year loan in the second quarter of 2000 to 7.11% a year later. By mid-2003, mortgage rates had dwindled to 5.24%, according to Freddie Mac.
The Census Bureau reports that 68.6% of U.S. households owned their homes as of the first quarter of this year, up from 67.1% in the first quarter of 2000. “That's close to 1.5 million [additional] households that are owners now, and that means fewer renters,” says Robert Sheehan, consulting economist for the National Apartment Association.
So how are owners convincing consumers to choose apartment living over single-family alternatives? The answer for many has been to enhance the renter's experience with new amenities. Owners are adding Internet cafés, state-of-the-art fitness centers and time-saving services along with interior upgrades that rival the finish of custom homes.
“The apartment industry has evolved past being just housing,” says Jonathan Holtzman, chairman and CEO of Farmington Hills, Mich.-based Village Green Cos., a privately held firm. “We are absolutely moving closer to acting like a hotel, in that we are providing time-saving services and resort amenities.” Village Green operates 27,000 apartments in more than 100 communities throughout the Midwest, and is one of the nation's largest luxury apartment developers and managers.
Out with the Old …
Hot tubs may have been the rage in the 1980s, but managers say many residents today are afraid to use them due to a perceived risk of dermatitis and other infections. Few will venture near a tanning bed, either, for similar health reasons. Instead, the new demands of a health-conscious generation of multifamily residents include “fitness centers that would rival a health club,” says Steve Hallsey, CEO of Chicago-based AMLI Management Co. With some regional exceptions, basketball and racquetball courts are also passé, although Englewood, Colo.-based Archstone-Smith reports its indoor basketball courts are used extensively.
Basketball and racquetball courts are still viable along the East Coast and in areas with a slow change of seasons, says Dirk Herrman, chief marketing officer for Alexandria, Va.-based AvalonBay Communities Inc. But AvalonBay's courts also double as informal meeting space for parents with young children. Simple additions like mirrors and a ballet rail open a racquetball court to yoga classes.
For many owners, large single-purpose athletic courts no longer see enough use to justify the expense of their construction and maintenance. “Basketball courts are a maintenance nightmare, and they take more abuse than use,” AMLI's Hallsey says. “If you're going to spend that kind of money building and developing, people would rather see granite countertops, Sub-Zero refrigerators and an upgraded flooring package.”
Dana Hamilton, executive vice president for national operations at Archstone-Smith, says rooms that once provided a venue for aerobics are being refitted with ballet rails and floor mats for yoga. The company has dropped community resource rooms for children from its new construction plans.
… And In with the New
Archstone-Smith is experimenting with interior finish enhancements today more than it has in the past, offering packages with the sort of countertops and floors to which Hallsey refers. But Hamilton says the two features her sales teams at Archstone-Smith have found most popular with residents are fitness centers and self-service coffee bars.
The company refers to the latter as “click cafes,” a cross between a business center and a coffee shop, where residents can socialize over a cup of gourmet coffee or browse the Internet on a laptop computer. “They are very successful and people are spending a lot of time there,” Hamilton says.
The coffee bar is hot in 2004. The cyber cafés that AMLI began building in 2002 have become popular gathering spots for residents, Hallsey says. “Anytime you can build a community feel where people come and socialize, you have a greater advantage in getting a higher lease renewal.”
AvalonBay is evaluating whether to phase out traditional business centers in favor of Starbucks-style lounges with wireless Internet service, Herrman says.
Gables Residential of Boca Raton, Fla., has already made that shift and is building Internet cafés with couches, cappuccino machines and wireless Web access instead of the business centers it once provided. Chris Sullivan, senior vice president at Gables, says the cafés offer the use of copier and fax machines in a relaxed atmosphere.
RMK Management provides both cyber cafés (with laptop computers) and business centers. Why? Rossi says not every resident in his complexes has a computer. He adds that the computers in RMK's business centers see constant use.
Fitness centers are another near-universal requirement for Class-A properties today. While some developers have provided weight rooms and exercise machines for some time, those centers are becoming increasingly elaborate. Some properties offer individual television monitors with each machine, for example, and multiple large-screen TVs are common.
Stewart Epstein, COO of Florham Park, N.J.-based Kushner Cos., says fitness centers are such a key to retaining residents that the company will sacrifice apartments to make room for one at an existing complex. “It's also to stay competitive with new construction, because most new construction includes fitness centers.”
Analyzing the Costs
Village Green's Holtzman says interior upgrades can cost $500 to $2,500 per apartment unit, and a modern clubhouse may run as much as $2 million. In the 1990s, owners might recoup those expenses with premiums, perhaps charging an additional $35 per month for a wood floor or washer and dryer.
But with occupancy only now beginning to improve after a three-year decline, such premiums are often dropped to keep rental rates competitive. According to M/PF Research, national apartment occupancy fell from 96.4% the end of 2000 to 92.7% at the end of 2003. Occupancy climbed slightly to 93.8% in the first quarter of this year.
Nevertheless, Holtzman says, outstanding amenities differentiate a property from its competitors. “When the economy comes back, then we can start charging for these value-added items that we gave away for free,” he says. In the meantime, property managers have come up with some creative ways to offer services at little or no cost, and a few even generate revenue.
At West End City Apartments in St. Louis, for example, Village Green brought in an outside provider to run a health club that extends discounted memberships to the property's residents. At the same complex, Village Green leases space to a sports bar and to a small food market that offers everything from groceries and liquor to ready-made meals and floral arrangements.
All of the retailers pay rent while providing discounts or services to apartment residents. Q's Sports Bar, for example, even provides room service within the complex. “That's a heck of an amenity for a pretty busy young professional,” Holtzman says.
AvalonBay has a similar relationship with retailers in San Jose, leasing space to a Starbucks, Blockbuster Video, dry cleaner and a pizza restaurant at its Alameda complex.
Long-Term Outlook
Owners and managers say the migration to single-family homes has already slowed, and anticipated increases in interest rates are expected to push more residents toward multifamily housing and help to firm apartment occupancy in the coming year. The average 30-year mortgage rate registered 6.25% at the end of the second quarter, according to Freddie Mac, up from 5.24% a year earlier.
More than half of Archstone-Smith's portfolio is located in Washington, D.C., and Southern California, two of the nation's healthiest multifamily markets. Hamilton says demand will soon outpace the supply of apartments in those markets sufficiently to allow rent increases.
Archstone-Smith, in fact, evaluates its amenity programs based on how those amenities can boost rent. “If we don't manage to get higher rents, then we stop doing them,” says Hamilton. As occupancy improves, owners in other markets will likely follow Archstone-Smith's example by charging premiums based on specific amenities.
But will an eventual return to higher occupancy rates across the country mean an end to the more lavish and costly amenity programs that have surfaced in the past three years? Probably not, Kushner's Epstein says. That's because properties will continue to compete with each other even when single-family housing loses some of its luster.
That competition is also likely to slow rent escalation, despite the higher costs some owners have absorbed to improve the amenities their communities offer. As Epstein says, “we do not intend to be leaders in raising the rent.”
Matt Hudgins is an Austin-based writer.
Service Providers Help Owners Defray the Cost of Creature Comforts
Time-saving services are a strong selling point with today's renters, but hiring additional employees to provide those services can be cost-prohibitive. Instead, some apartment managers are turning to outside providers as a way to serve tenants without adding to the owners' expense.
Some owners even receive compensation from the companies that serve their residents, says Jonathan Holtzman, CEO of Farmington Hills, Mich.-based Village Green Cos. A vendor that is allowed to offer residents a discounted package of high-speed Internet access, telephone, and cable television, for example, may agree to pay the apartment owner a fee based on the amount of business the arrangement generates, Holtzman says.
Houston-based Q-Corps Residential Inc. provides AMLI Management Co. and other clients with an online tool called The Resident Connection to streamline access to as many as 30 residential services. A resident logging onto an AMLI Web site can use the system to arrange a change of address, utility connections, newspaper or magazine subscriptions, appliance rental or renter's insurance.
Q-Corps Executive Vice President Frank Arbide says an apartment owner pays a setup fee of either $1 per unit or $250 per property. Once the system is in operation, the owner receives rebates to defray the setup cost, based on the volume of business generated for the service vendors.
Q-Corps' revenue comes from the service providers, who pay a fee in return for the increased business volume the system generates, and for an exclusive right to service specific properties.
One of those service providers is Atlanta-based BellSouth Telecommunications Inc. Lin Atkinson, director of alliance partnerships at BellSouth, says he noticed his order volume increasing soon after the company signed on with Q-Corps, particularly in the evening and late-night hours.
“With Q-Corps, tenants can order services at 2 in the morning when most of my stores are closed,” he says. “From a vendor's perspective, participating in an amenity that makes the customer's life easier helps position us as a preferred choice. That gives us additional market share.”
Arbide of Q-Corps says apartment owners often use the system as a closing tool, helping a tenant perform such tasks as connecting utilities and changing addresses on the day a lease is signed. That basic assistance helps increase the individual's commitment to the property and reduces opportunities for backing out of the lease.
“Where the [property] owner will reap the benefits are in tenant retention, increased customer service and reduced renters' remorse,” Arbide says.
Lease equity programs are another amenity gaining popularity. Acknowledging that many renters will eventually move on to home ownership, a lease equity program promises the resident a rent refund toward the purchase of a home at the conclusion of the lease. Holtzman says his company pays as much as $2,000 in a single refund.
While Holtzman declines to reveal details of his company's lease equity system, he says Village Green works with homebuilders and preferred brokers to provide the rebates. “It's not an expense [to Village Green].”
— Matt Hudgins