The same set of circumstances that forced Fairfield Residential into a short sale last summer in Gilbert and Camden Property Trust to predict double-digit drops in NOI in the Valley of the Sun is bringing prosperity to Arizona native Mark-Taylor Residential’s doorstep and lured California-born Western National Group to open a fee-management office in Scottsdale in July.
During his Q4 2008 market report, Camden President Keith Oden said his standard response to the question, “What is an F market?,” has echoed the sentiment of Supreme Court Justice Potter Stewart, when the legislator was asked to define pornography. “I cannot define an F market, but I will know an F market when I see it.
Phoenix with an F
“This year we have one market where we are budgeting net effective rents to decline by seven percent and NOI to be down by low double digits and that most certainly meets our definition of an F market,” he said last February and that dismal prophesy turned out to be somewhat optimistic.
Camden saw NOI decline 16.5 percent year-over-year, as of the end of September, in Phoenix, the worst performing of the 15 coast-to-coast markets across which the REIT’s 63,000 units are located in 183 properties. The portfolio-wide year-over-year NOI declined just seven percent and occupancy at the end of Q3 2009 averaged 94 percent, with the D.C. Metro at 96 percent and Phoenix at the low end, with 10 percent vacancy, which is average for Class A properties today in the Valley of the Sun.
Oden expects NOI for Phoenix will be down a total of 13 percent to 14 percent by the end of this year, which, added to last year’s seven percent drop, equals at least a 20 percent reduction in NOI over a 24-month period for Camden’s troubled desert portfolio that consists of 2,433 units in eight properties. Job losses for 2009 are expected to reach 116,000, bringing the beleaguered city’s total employment hemorrhage to 200,000 in a two-year time span.
“Any way you look at it, Phoenix is a really challenged scenario for us,” said Oden.
Enter Western National
“It might be an F-minus, now,” remarked Tom Shelton, president of Western National Property Management, in October, “but we feel the timing is ideal for entry.”
Shelton joined Western National a year ago, after 11 years with Greystar, where he was operating partner in the western region, overseeing Greystar’s 27,000-unit third-party management portfolio in Phoenix, Albuquerque, Tucson, Las Vegas, Denver and Los Angeles.
The 45-year-old Western National Group, a fully integrated multifamily acquisition, development, construction and property management firm that is the second largest owner of multifamily housing in Orange County, Calif., is prepared to become a major apartment player in Arizona, Shelton said last June, when the company opened its first-ever office outside of its home state.
He said he was sure the many years of experience in multifamily management his team possesses would enable the company to make an immediate impact for communities in Maricopa County that may currently be struggling with occupancy issues.
By mid-August, that prediction was on its way to reality when Western National secured management contracts for four garden-style communities with a total of 854 units — the brand new 312-unit Harmony at Surprise on the northeast edge of the Phoenix MSA and the 204-unit Esteban Park, the 174-unit Silver Creek and the 164-unit Ridgepoint in Phoenix.
When Western National took over, two of the properties that had broken ground in late 2005 or 2006 still were in the process of transitioning from their construction loans to permanent financing, not an easy task in a tight credit market that is dominated by the government-sponsored agencies.
“One we were able to get through Fannie Mae and that’s closed. And the second one is going through a HUD financing. The other two already have long-term fixed-rate debt and they’re fine,” he said.
“All four of those projects have done pretty well,” Shelton reported at the beginning of October. When his management team took over the assets, their average occupancy rate was in the mid-80 percent range, which Western National increased to around 92 percent in just three months.
Increasing the bottom line
“We’ve instituted some rather rigorous enforcement of rent collections, so, in addition to pushing occupancies, we’ve been able to increase the bottom line by being a little bit more aggressive in terms of rent collection,” he said.
He’s watched rents decline about one percent on those renewals over the past six to nine months and around three percent on new leases, but Shelton believes that the downward trend has begun to stabilize.
“Easily concessions are ranging anywhere, market-wide, from one month on a 12-month lease to three months,” said Shelton, adding that he read recently that 90 percent of the apartments in Phoenix are offering some type of concessions and his assumption is that most of them are in that six- to eight-week category.
In order to boost occupancy, Shelton’s team has focused on operations, making sure the staff is right for the property and the tenant pool is of the quality of residents the apartment owners expect, he said.
“It’s easy in this market to fall back on credit requirements and credit scoring and reduce your qualifying criteria a little bit, but we’ve been successful in not having to do that,” he said, calling the misguided strategy “a short-term solution that creates a long-term problem.”
A new approach
Veering off a little from traditional management behavior, Western National has instituted a very aggressive renewal program to manage lease expirations, he said. “We are going out as much as 90 days on renewals, trying to get people locked into a new lease, which is a little unusual, but it’s a function of the market.
“When the market is strong and you’re able to raise rents, you typically wouldn’t do that any sooner than you had to, but these days, we believe that you’re very unlikely to get any type of increase on renewals, and in some cases effective rent you’re offering a new customer is lower than what the people that are already in the building are paying.
“So, we’ve at least taken the posture that the sooner we get people renewed, the sooner we will stabilize the occupancy,” said Shelton, who heard some good news at a real estate conference he attended in early October, when representatives from Fannie Mae laid out their criteria for multifamily loans.
“They still have money to lend and they’re offering competitive rates and 70 to 75 percent loan-to-value, but their decision to lend is based on a combination of two things these days. The first is the market and the second is the sponsor or the buyer,” he said.
Experience makes the difference
If an acquisition hopeful asks Fannie to help finance a multifamily real estate venture, it has to be a great deal in a great location. But, if the potential borrower lacks a history of being a good operator, hasn’t done business with Fannie before and has no track record, one of two things are going to happen, he explained.
“Either you’re not going to get the loan that you think you should get or they’re going to insist that you go find an operator and a manager that has a track record of operating real estate in that market. And then you have a much higher probability of getting closer to the loan you think you ought to get,” said Shelton.
“We have a long and successful track record with the agencies that are in this business, as well as HUD and FHA and we think that’s going to work in our favor. If there’s any likelihood of getting a deal refinanced or a new loan put on a deal, it was pretty clear that you’re going to have to have somebody to be aligned with that knows what they’re doing,” said Shelton, whose property management division oversees day-to-day operations of 23,184 units in 155 communities, divided just about 50/50 between fee-managed and company-owned.
At the end of September, four Southern California apartment communities; the 153-unit Fountain View in Long Beach, the 232-unit Club Pacifica in Covina, the 80-unit Luis Moreno in Calexico, and the second phase, consisting of 38 units that were recently added to an existing multifamily asset in San Juan Capistrano at a community Western National Property Management already manages, joined the company’s roster of fee-managed communities.
New contracts ahead
And, as a result of the contacts that Western National has in Phoenix, the new management office is receiving a lot of phone calls and inquiries from other owners asking Shelton’s team to take a look at some of their deals.
“We’re looking at a couple of management opportunities for portfolios of distressed assets. And, interestingly enough, we’ve had some calls from financial institutions that have asked our opinion about some things, and I think we’re going to end up doing some management for them.
“And then we have a lot of buyers interested in some of the distressed deals in Phoenix and they’ve asked us, if they are successful in getting one under contract, would we help them with due diligence and we’ll ultimately manage those for them,” he said.
“There’s a lot of real estate there under a significant degree of stress these days,” he said.
The Mark-Taylor way
“We’re pretty close to hell, but the good thing is, we’re going in the opposite direction,” is Mark-Taylor President Dale Phillips’ favorite quote about the market in Phoenix lately, but he says it with a smile.
And, while Phoenix might be residential hell for some, the economy has proven positive for the company that was founded nearly 20 years ago by Principals Jeff Mark and Scott Taylor and made a name for itself developing luxury apartment communities during its first decade. And, since Phillips took over as president, the firm has focused on building up its fee-management business, a strategy that has created an opportunity for prosperity today.
“It’s good in the sense that we have been able to grow during this cycle,” said Phillips, who joined the company in 1995 as asset manager and took over the reins of the firm in early 2003. With 97 percent of the company’s managed portfolio owned by others, “the fee-managed portfolio is creating the income necessary to allow us to grow,” he said. When he first took over as president, less than one third of the company’s portfolio was owned by others. Today, 97 percent of Mark-Taylor Residential’s 12,300-unit portfolio is fee-managed and has grown by 2,300 units since August.
And that portfolio was 92.5 percent occupied by the end of October, performing about five percent above the market in Metro Phoenix, with concessions of about 13.4 percent in a climate where Phillips has seen signs that advertise up to four months free on a 12-month lease. “That’s as desperate as I’ve seen it,” he said, adding that a Mark-Taylor-managed community in the little bedroom community of Ahwatukee is offering concessions of just two percent on a one-year lease.
Entering new territory
In a completely coincidental conjunction of plays, Mark-Taylor also began to expand its geographical footprint outside of its home state within weeks of Western National’s arrival in Phoenix. In July, Mark-Taylor opened its first-ever office outside of Phoenix in Portland taking on the management of six communities consisting of 1,000 units for an existing customer and, in mid-November, took over the management of 309 units in three communities in Seattle for another client. Also, since August, the company has added another three communities to the company’s fee-managed portfolio in the Phoenix area.
Mark-Taylor Residential’s fee-management business growth really took hold when 2,176 units in seven assets the company built between 1995 and 2000 in a development partnership with the German DLF Fund were sold in June 2006, reducing the company’s managed portfolio to around 4,200 units.
The motivation to embrace the fee-management business with increased enthusiasm grew out of that experience. “When we were touring national buyers for the seven-property portfolio, we realized that, because of the quality of the portfolio and the attractiveness Phoenix had for apartment sales, we were going to have before us a lot of potential clients,” said Phillips.
“We treated that as an opportunity to introduce ourselves and our management services and make certain that all of them knew we were available for hire. So, over the years, I think that’s probably been the one strategy that I look back to that helped to promote all this success,” he said.
“In most situations like that, onsite teams or management companies can become less enthusiastic when touring properties for sale, as they most likely are putting themselves out of business. We went in the opposite direction. We put our best foot forward. We treated it as the biggest opportunity we’ve seen in the history of the company for growing the management company,” Phillips said.
When a plan works
And, it worked and is still working. “It’s one of those things where you actually have a plan and it comes off like it’s supposed to and then it delivers results and you love it. We meet people every day, now that Phoenix is a market that all eyes are upon. We have conversations all the time with potential buyers that recall touring our communities, remembering our management company. It’s a great time,” he said.
“One of the unique things about us is we manage properties for companies who actually have their own management company in other markets. When they come to this market and do their due diligence, they learn that we’re the best management company and they defer to our local expertise, as opposed to bringing in their own management company,” said Phillips.
A combination of powerful ad campaigns and web-based marketing have nearly tripled the management division’s portfolio since mid-2006. In order to create traffic across its portfolio of architecturally diverse multifamily properties and maintain its brand identity, the company rolled out multi-pronged seasonal leasing campaigns. The summer promotion is anchored by Roberta, Mark-Taylor’s iconic cheerleader, dressed in 1970s garb, while rocking to a 2000’s iPod.
The 2007 campaign included weekly pool parties, a radio station sponsorship, print advertisements, banner ads and links on Internet listing services and social networking sites, free iPods and rent concessions, and email blitzes about the “Summer of Love” campaign.
Roberta returns
Sign spinners “spin” at property entrances, each with cardboard cutouts of Roberta and moving truck advertisements featured the company’s “Dancing Diva.” All this resulted in a moment of fame for Roberta when the company announced the “kidnapping” of the campaign icon from Mark Taylor’s San Pedro property and made a plea for the six-foot tall, 52-pound cardboard cheerleader’s “safe return.”
The banners and links to MySpace generated more traffic and the Arizona Republic picked up the story of Roberta’s “kidnapping” from San Pedro. “‘Diva’ believed to be swept away by worker,” the newspaper reported. The 180-unit property’s occupancy rose by nine percent to 98 percent during the $2,500 campaign that came to a total cost of $6,200 across the entire portfolio.
The campaign returned in 2008 and, again, in 2009. Targeting the affluent renter in the greater Phoenix area, it succeeded beyond all expectations. From June 1 through Sept 31 of this year, the campaign generated 17,889 leads and 2,449 leases across the entire portfolio.
Last year, the company’s football campaign included radio broadcasts and sponsorship of the state university’s athletics department and community tailgate parties and door prizes like a flat-screen TV. Although the campaign took place from the beginning of September to the end of November, normally a slower rental season in Phoenix, Mark-Taylor generated more than 13,000 leads that translated into nearly 1,100 leases.
Roberta rocks on in this year’s fall football campaign, “Life Upgraded,” which began Oct. 1 and includes commercials on two Valley radio stations daily through January and a TV appearance to highlight weekly tailgate parties at all the communities Mark-Taylor manages has generated 7,927 leads and 548 leases across the portfolio in the first six weeks.
The keys to success
“The key to the success of these campaigns is owners get to participate in big advertising at a fraction of the cost. The strong brand identity paves the way for each property to benefit with increased traffic and leasing activity,” Phillips said.
Recognizing early on that it would best lay the foundation for such campaigns by building a strong Web site, Phillips believes Mark-Taylor is at the front of the cyber-pack because the corporation was willing to invest the dollars to benefit current and prospective owners, creating a Web presence that mirrors industries, like hotels, airlines and retail operations, that have successfully created connectivity with large audiences.
The clients on Mark-Taylor’s list range from insurance companies and institutional owners, pension groups, private owners and national developers like Trammell Crow and Wood Partners. “Premier Residential Group has their own management company. GID has their own management company, Greystone has their own and BlackRock owns Metric, so they have their own. So we’re working for companies that have their own management companies and that’s a great compliment to what we’re able to provide,” Phillips said.
The company’s ability to drive performance owes much to its very low employee turnover rate. “Turnover is expensive and what keeps people here is being able to educate them and what makes them powerful and able to perform is to progress that education,” said Phillips.
“We have an incredible in-house training program called Mark-Taylor University, which includes in-person, classroom-style training and e-learning opportunities. We are constantly evolving our educational programs to create more sophisticated sales people. You can’t do that if your door is always revolving, he said, adding that the same applies to the service side of the business.
Turning off turnover
“For example, in 2007, our company turnover was 33 percent, which is well below the national average. The market was great and people had job opportunities all around. In 2008, turnover dropped to 30 percent. Year-to-date, with October numbers, it’s at nine percent,” he reported, explaining that people who come to work for Mark-Taylor stay because they’re learning, making money and building a career.
“I have literally zero turnover among my community managers, a four percent turnover in my maintenance supervisors and those are the two most powerful positions on the property. They make decisions every day for the owners and the owners can rest assured that they’re going to be working with the same people day in and day out, month in and month out, year in and year out without a constantly revolving door,” he said.
While he and Shelton and Oden all agree that Phoenix may be near the bottom and the market has all the required components for eventual prosperity, he doesn’t expect a rapid recovery from the slump that has cost the market four- to six-percent reductions in new lease rates and two- to three-percent drop in renewal rates over the past 12 months.
“We won’t be jumping out of this ditch in a couple of leaps. It’s going to take a lot of very diligent steps and micro-management of revenue and expenses every day to climb out of it. The end is a long ways away, but we can still just be diligent managers of investments during the process and learn and adjust fast and capture any opportunities that come along,” Phillips said.
