Commercial real estate investment is an ever-changing business. Wise investors stick to their guns with timeless and sage fundamentals: picking location wisely, focusing on cash flow rather than solely equity appreciation and my favorite – making your money on the “buy.”
As markets ebb and flow, new fundamentals emerge. And while they don’t supplant a wise investment thesis, they can augment tried-and-true strategies to produce outsized returns. Apartment investors currently face a challenging landscape with high-cost assets borne of a cap rate-compressed market and significant competition on both acquisition and management fronts. In such an environment, beyond traditional notions of “smart investment,” investors should pay close attention to two essentially modern concepts: experience and community.
Experience is quite possibly the most important word in today’s modern world of commercial real estate. Creating an experience is how businesses attract clients, topple competition and remain relevant. Apple was a first mover in taking what was a staid business, the technology store (remember what it felt like to walk into a Radio Shack or Circuit City?) and turning it into an experience.
In our Internet economy, retail continues to experience a shift online. Yet smart retailers have come to understand that experience is paramount. Amazon.com is opening brick-and-mortar stores, and purely online businesses such as Bonobos are opening storefronts.
Retail has always focused on experience. But as other asset classes mature, they too are focusing on experience. Hospitality lives in a world of experiential marketing and product offerings. Any guess why tech companies offer bowling alleys, ping-pong tables and keg parties? Experience.
Apartment investors are smart to focus on key fundamentals of location, asset cost as it relates to return, and management efficiencies. However, in our modern investment environment, more advanced strategies are necessary to garner the highest level of returns.
Many apartment investors use location as a facet of experience. Others are perfecting property management practices to promote a less transient resident experience. Selecting retailers in mixed-use buildings that are accretive to the resident experience is yet another approach. The challenging and rewarding aspect of curating a resident experience exists in the variety of methodologies available.
For centuries, the concept of community has kept both homogenous and disparate groups together through a common bond of connectedness. At a recent industry event an owner of a portfolio of 4,000 infill units in San Francisco described his strategy of tribalism: His boutique building of 30 to 40 units are filled with tribes of residents, which are communities.
In this post I have yet to use the Millennial, but I must return to my Millennial crutch. Millennials love community. They want to feel connected to something. Whether they find community on Facebook, a kickball league (which must of course involve beer) or a community of fellow residents, connectedness via community is key for this generation.
We are all more connected than we have ever been. We are connected on Facebook, LinkedIn or some other digital platform used to aggregate our love for ice cream or puppies. And often the lament is that everyone is less connected as we all stare at our phones or live alone (Seattle tops the nation in single occupancy households). Community provides the essential element lacking in connectedness.
From an apartment investor’s perspective, when community — or tribalism — is created and nurtured, residents stay put. Vacancies decrease, renewals increase, R&M and turn costs decrease, and the resident experience is more “sticky” with a lower sensitivity to pricing – hence the ability to raise rents without losing tenants.
Creating community, just as creating experience, is challenging and rewarding. Helping establish community in an apartment building can come as early as floor-plate design and building/amenity programming. Yet, building design and the provision of amenities are only a start.
Property management is key, as is finding ways to bring the local community inside the building — whether in the form of authentic interior design or actually inviting local artists, artisans and retailers to participate in the community of the building. Creation of community is an essential component of the outperforming residential asset.
How hard is it to create experience and community?
The concepts described here may sound lofty; they are. They may sound difficult; they are. And further, they may sound expensive; they are. Yet, the counterpoint is the expense of ignoring the industry’s changing landscape.
Resident renewals in Seattle continue to wane as a result of mounting incentives at competing buildings. Some urban neighborhoods have new apartment buildings on two or three corners of an intersection. Urban Seattle experienced the delivery of 5,700 units last year. Nearly 10,000 are set to deliver in 2015 and another 20,000 in the ensuing three years.
The best strategy for a sustained and growing revenue stream is to maintain the one you have (without the hassle and expense of replacing it). Residents are unlikely to exchange a few concession dollars for having to depart from an experience and community they have grown to love.