Commercial real estate investment is an ever-changing business. Wise investors stick to their guns of timeless and sage fundamentals of picking location wisely, focusing on cash-flow rather than solely equity appreciation and my favorite – make your money on the “buy”.
As markets ebb and flow new fundamentals emerge and while they don’t supplant wise investment thesis, they can augment tried-and-true strategies to produce outsized returns. Apartment investors currently face a challenging landscape of 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 on 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, yet as other assets 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 seeking 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, tied by a common bond of connectedness. Recently I attended an industry event and an owner of a portfolio of 4,000 infill units in San Francisco described his strategy of tribalism. His boutique 30 and 40 units building are filled with tribes of residents – communities.
In the first 500 words of this post I have yet to use the Millennial, yet I must digress to my Millennial crutch. Millennials loves community. They want to feel connected to something. Despite 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.
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. Yet, often the lament is that everyone is less connected as they are staring at their phones or living alone (Seattle tops the nation of 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 with out 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 is 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 herein 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.
To discuss and understand the best in experience and community in Seattle – and to work on strategies to better position your assets and align you investment goals – please contact me directly.