New Home Insights Podcast Episode 36 Transcript | John Burns Real Estate Consulting


Episode 37: How Apartments Can Adapt and Thrive as the Market Shifts

Transcript

Dean Wehrli:

Welcome to New Home Insights, the John Burns Real Estate Consulting podcast of the US housing market. I’m your host Dean Wehrli. Today we are going to move to apartments. We’re going to examine the future of apartment development and design, both through the lens of COVID-19, but also more in terms of ongoing market forces.

Dean Wehrli:

For that we’re joined by Greg West, the CEO of ZOM Living. ZOM Living develops some of the most innovative apartment complexes in the country in both urban and suburban locations, Florida, Washington DC, Chicago, North Carolina, Texas. Greg, please say hi to the folks and tell them about yourself before we get started.

Greg West:

Well first of all, thank you for having me. I appreciate the opportunity to speak to your audience. ZOM Living is a multifamily rental developer, is our specialty. We typically build about, or start about 3,000 units per year across that geographic spectrum that you mentioned. We build in urban places and high-rise buildings and mid suburban places where we build mid-rise buildings. We also build garden apartments in the outer rings of the suburbs. So, an all manner of rental housing is our specialty.

Dean Wehrli:

Did I get your footprint right? You’re Texas throughout the Southeast, up into DC?

Greg West:

Absolutely. Yeah, that’s correct. Soon to be expanding into Boston and Phoenix.

Dean Wehrli:

Nice, okay. Oh, so pretty much a national footprint. So, let’s start. So very generally, how much of an impact has COVID-19, the pandemic, had on your business, your operations, as well as just strategy?

Greg West:

So there’s a few different buckets of our business. The operating side of the business where we have projects that are complete and full of residents. We’re seeing very stable operations. Our collections have been about 95% and April, May, and June through the pandemic. We had a very substantial impact in terms of the absorption of apartments and leasing early on in the pandemic, but as we started to fall out a little bit, I would say we’re about 75% to 80% of the sales velocity that we would normally expect pre-pandemic, but we are seeing a little bit of softness and red. So, I think we’re going to see for sure, a near term downward trend in rents, but I’m also expecting that to recover quickly.

Greg West:

Another aspect of our businesses is the building side of course, and through the construction of buildings during the pandemic, we’ve been predominantly unaffected. I mean, we’ve had a little bit of manpower production issues because of the social distancing and having particularly in very urban buildings, where we have taking men and materials in, and buck hoist into the building. Where we might have 15 or 20 men in a buck hoist, now we can have three or maybe four to spread them out, and also spread them across the apartments, but that’s been largely unaffected.

Greg West:

I think the one thing that I’m really pleased about is on the capitalization side of our projects. We’ve already this year closed two development deals. Next week, we’ll close two more, and I expect one or two more before the end of the year. All of these were with financial parties who we had engaged with before the virus and have stuck with us. But, I would say that we’re not expecting to see much demand for people to put money out in development, new money, through the rest of this year, but our investors are starting to talk to us about what opportunities will be available next year.

Dean Wehrli:

So you haven’t been unscathed, but nothing like, the end of the world scenarios that some folks early on were talking about?

Greg West:

2008 felt like the end of the world to me. This feels very, very different. It is a far better situation than it was then.

Dean Wehrli:

Right, so we’ll get back a little bit to some more general at the end. In the meantime, I want to go to a little bit more specifics. Let’s first talk about operations. How has COVID changed how you operate your apartments? For instance, has it changed the leasing process? Are you more virtual?

Greg West:

It has changed the way we lease in a material way. Some of these things are trends that started before the virus, but the virus has accelerated. We see more and more people wanting to engage with us online. Even before the virus, leasing without ever seeing the apartment, but it has accelerated our effort to provide people virtual settings where they can see and explore the living unit on their own and in the virtual environment. We have leasing folks that will actually conduct tours on FaceTime with people to take them around the apartment. We have, for the first time during the pandemic, started doing self-guided tours in leasing, and letting people do the tour entirely on their own on property. I think that’s a secular change in our industry that we’ll be able to conduct a sales and marketing process without a sales marketing person. That’s not for everybody, but some of the customers actually really enjoy that.

Dean Wehrli:

You mean the keyless entry is becoming all the rage in the for-sale space?

Greg West:

Absolutely keyless entry to get into the common area of the building, but then also into the unit itself. So you can engage with us remotely through our website portal and get to the unit, see the unit, execute your lease online, and literally never engage with a physical person.

Dean Wehrli:

Yeah, yeah. I mean honestly, that does seem like one of those trends that made sense before and just is very quickly accelerating now because of COVID.

Greg West:

It’s kind of a scary thing because it’s so fundamentally different than the way we traditionally do things. So there was a bit of reluctance to jump into that in a big way, but the virus has forced us to embrace it and try to make the best of it. It’s working better than we thought it ever would.

Dean Wehrli:

How about exteriors, the layouts, how has COVID, or trends, any, even not related to COVID, going in terms of exteriors and layout of an apartment complex? Will you, for instance, look at to make a complex more open or even the other way around, a little more compartmentalized because of COVID?

Greg West:

Yeah, I know. I mean, it’s not changing the way we think about people’s fundamental desire for space and use of space. It’s certainly awkward right now because in our common areas we’re having to limit the number of people that can go in those spaces, spread furniture around to facilitate social distancing, and doing all those things. But, this virus comes, who knows? Once every 100 years or so, so we’re not preparing for another event 100 years from now.

Dean Wehrli:

Yeah. So it’s not something that you’re going okay, let’s change everything. Let’s rethink everything because apartments take a long time to build, let alone, their usable life.

Greg West:

Yeah. I mean, there’s some subtle things like adding touch-less fixtures and touch-less environments where you can. I mean, I think that’s just a good practice that you would do regardless of the virus, but is there a fundamental shift in the shape and form coming to apartment buildings? No, I don’t see that happening.

Dean Wehrli:

How about the interiors? Let’s go inside the apartment. Does COVID impact designs, for instance here, will there be more enclosed spaces in floor plans? So people can maybe shelter a little better?

Greg West:

I don’t see that happening either. I mean, there’s such a strong preference for that larger open area in apartments. I think people’s preferences for that will remain. I do think that people, this we’ve all learned and I see it in my own company, it’s just surprising to me, how effective we are working remotely. Everybody’s in their home. We’re getting our work done at almost in exactly the same efficiency as before. There’s some downsides to it, but providing people maybe a place to work in their home, I think may be a higher priority than it was before, because although I don’t think offices are going away. I think that people may have a stronger portion of their time, they may work remotely than they did prior to the virus.

Dean Wehrli:

Do you think unit sizes will get any larger at all? Because I mean, that’s going to be really hard to do. You still have to have, those old equations still are in force, unit yield and things like that. Will COVID impact those kinds of factors?

Greg West:

No, I don’t think so. I mean, housing affordability was a major factor before the virus and it’s going to be a major factor after. You start adding more space and you’re going to change the economics of what it costs to live there. That won’t be successful.

Dean Wehrli:

It’s like the open versus closed a little bit, isn’t it? It’s that there’s always this trend in the for-sale space as well, towards these open floor plans. It’s this battle between what people want long term and what they feel the pressure very short term. The long term is probably going to win out.

Greg West:

In that, when you think about it, you have that open space, you can make it whatever you want. Starting to splitting that area, make more of it office, more of it living room, more of it dining room. It gives you flexibility. It doesn’t help you in the moment of the pandemic where you need to isolate somebody, but I’m not worried about that happening any time soon.

Dean Wehrli:

Disregarding COVID, are there any floor plan design changes, trends that you’re seeing right now in any sense?

Greg West:

Yes, and this is tied to the housing affordability issue that I mentioned a moment ago. With our smallest units, it’s really hard to make one-bedroom units. I mean, it’s really hard to make a great living space when you prioritize putting the bedroom and the living room on the outside wall and provide them, therefore traditional windows, and in both cases. We started to move that bedroom inside the unit, make all the living space on the outer wall, but do a seven foot high or so enclosure of that bedroom. So it does get natural light. We find that people live in that small unit typically are single, and they don’t have roommates and typically not spouses, so they mind it’s not a privacy issue for them because they’re the only one occupying the unit, but it takes that living room, which would be typically 10 feet wide and it makes it 20 feet wide. You have twice as much glass and that unit lives like it’s 1,000 square feet, but it’s typically 700 or even 650.

Dean Wehrli:

How about amenities? We mentioned home offices just a second ago, maybe trying to get some home office space in the unit, that’s going to be hard. Is that going to impact the community amenities like with bulked up business centers, or something like that?

Greg West:

I think that the home office and the traditional term of it, people still tend to think of it as like, I got to have a permanent desk somewhere because… and people felt that way because you had a giant computer with a fixed monitor and all this stuff and the home office now is a laptop and a cell phone and not even very many pieces of paper, so it’s totally mobile and it can be anywhere. So it could be anywhere in people’s apartment, but people also like to get out of their apartment and one of the strongest trending things that we have in our amenities in our buildings, this is before the virus, is providing a coworking area within our buildings. So we provide some private offices, we provide meeting rooms, we provide common coworking areas where people can gather and either interact or not interact, but a very… Places, high style and high function outside of their units, and it’s been surprising to us how much usage we have from our residents.

Greg West:

I thought intuitively when we started doing it, that we would have maybe more demand for that in the suburbs and less in the urban locations but actually, the urban locations is the strongest demand because these people have chosen to live downtown and often it has nothing to do with being closer to their job. It has to do with them wanting that urban lifestyle and wanting to be in downtown, but they work from home and they really value that opportunity to have a place to work outside of their unit within their building.

Dean Wehrli:

So, that’s a great segue. Let’s switch to how COVID’s impacting maybe different markets or different residential environments. So, lifestyle is a really key factor when you guys are designing apartments. How big a role does that play in terms of the area and how you assess a market or even a specific part of a market for potential apartment development?

Greg West:

We look at the statistics, of course. We’re looking for income, we’re looking for job growth. We’re looking for what the governmental challenges are to executing in that area. But the pedestrian value of that location is a huge factor in our equation. People having the opportunity to walk from where they live to where they recreate is a huge value add to almost all of our residents.

Dean Wehrli:

That impacts how you look at suburbs versus city centers or even different types of suburbs, maybe?

Greg West:

It does, and the city centers speak for themselves. Most of them that are healthy have a nice mix of those things. But in the suburbs, I’ve heard folks at John Burns call it Surban. I agree with that, which is that you’re creating a little urban node in the suburbs and the scale of it is different than downtown, but it’s enough. It creates a grocery store that you can walk to, a restaurant, a park, those kinds of things. People will prefer and pay more money to live in that node than they will in a place where they can get nowhere unless they get in their car and go.

Dean Wehrli:

Yeah, I find those places though, those Surban, those true suburban locations with that walkability, those are pretty uncommon, aren’t they?

Greg West:

They’re becoming more and more common. I mean, I think that the developers are really starting to see and appreciate the value of them, but for sure, they’re hard to find.

Dean Wehrli:

Are the suburbs going to adapt maybe and factor this in when they’re zoning, when they’re designing their residential areas and their commercial and residential areas? Are they going to adapt to this? Are they seeing the value in those kinds of landscapes?

Greg West:

It’s for sure going to happen. I can explain simplistically why. I mean, the millennials are having babies and it’s just starting and a majority of them lived in urban somewhere and they see themselves as different from their parents and having a preference for this urban lifestyle, but they’re still going to move to the suburbs because that’s where the better schools are, that’s where there’s more open spaces for the kids to play. But they’re going to have a preference to consume housing that meets that Surban criteria and developers are going to satisfy that demand.

Dean Wehrli:

So, the suburbs are going to have to say something like, “Come for our schools, but stay for our micro brews.”

Greg West:

That’s it. That’s good, I like the slogan.

Dean Wehrli:

I’ll use Surban, you can use that slogan. No wait, yeah. If you want to use that slogan, you have to call me. No, I’m just kidding. So how about, are you a believer in the much talked about movement, maybe even partly due to COVID, of folks fleeing urban areas into suburban areas, even without the Surban kind of product?

Greg West:

I have heard, I’ve spoken to a lot of my colleagues in the home building business, and I have for sure heard of sales happening for that reason in recent months. I think that is a temporary thing. If I think back to 9/11, when that event happened, people were certainly afraid to get on an airplane. They were afraid to go to a public event because there might be a terrorist bombing, a restaurant, a concert, a sporting event, what have you. We all got past that really fast, and our memories were short. I think a vaccine to this virus will, the exact same kind of trend will happen.

Dean Wehrli:

So we’ll have fairly short memories like we typically do?

Greg West:

Yeah, there’s no doubt about that.

Dean Wehrli:

Are there any markets, as in Metro areas, that you’re more attracted to going forward? Or, the reverse, that you find less appealing? Whether it’s COVID or not.

Greg West:

Yeah, yeah. COVID has, in that context, has no impact on our priorities. We always gravitate to markets where we see the strongest amount of job growth. That doesn’t mean there aren’t development opportunities and markets where there is less job growth. There are, but you see them in more abundance where the jobs are happening and that’s places for us like Dallas, Austin, Charlotte, Florida. Some places that we would like to be, like Phoenix and Boston.

Dean Wehrli:

You got to be careful though, don’t you? Because a lot of times the supply does follow those jobs and that imbalance can be created.

Greg West:

Yeah. I wish we were always alone when we do these things, but we know we never are. You always have to weigh that and the risks. To some degree, those places like Boston, like South Florida, where the barriers to entry are higher, you can isolate yourselves a little bit from that supply risk, but it’s always there and it’s always a part of the equation and underwriting, whether you proceed.

Dean Wehrli:

But for Boston specifically, aren’t the accents a huge turnoff? How do you deal with that? Just kidding Boston.

Greg West:

I can look past that.

Dean Wehrli:

I honestly, can’t. Big picture again. Do you see COVID changing market dynamics for the rental sector as a whole? We touched on it at the beginning here, but do you think ultimately it’ll hit renters more than homeowners, for instance?

Greg West:

No. Well, I take that back. Yeah, I do think that in the class B and C apartments, those renters are going to be hit disproportionately harder. Those are the folks who drive Uber cars, they work in restaurants, they work in hotels. Those are the segment of our population who lost their jobs because of the pandemic. They for sure are impacted in a more severe way. The people in the class A apartments who are more white-collar jobs, where their employment situation was more stable and therefore different.

Dean Wehrli:

You might’ve just answered it, but I think I’ll ask this question anyway. Do you think COVID is going to hit, or is hitting some rental price niches more so than others?

Greg West:

Yeah, for sure. In B and C it’s… and you can see it in the collections. In the class A space is mid 90s in most markets across the country, but in class B and C, it drops into the 80s and sometimes 70s, in terms of percentage of monthly collections. So, there’s clear evidence out there saying that’s the case.

Dean Wehrli:

So just to be clear, your collections have been much stronger in the comparatively higher price niches?

Greg West:

Yes, that’s right, Because the job stability has been higher at the higher end of the market.

Dean Wehrli:

Is COVID impacting the turnover of your… are you getting more churn, more monthly turnover of folks because of COVID, moving in and out?

Greg West:

It’s kind of a mixed bag because a lot of people, our renewals are higher than they normally would be in a non-COVID environment because people don’t want to have to deal with moving in this environment and having to be around all the people that you have to deal with in moving. We are conversely leasing fewer apartments every month than we normally would in this environment because people are less mobile because of the COVID environment. But on balance, if you balance those two things, we’re really able to hold our occupancies about where they were before the virus happened.

Dean Wehrli:

I mean, we’ve had this very recently. We’re recording this by the way, on just June 25th of 2020. We’re right here at the end of a week or two of a lot of a COVID resurgence here. Is that worrying you at all? Have you seen any real time impacts from that?

Greg West:

No, I can’t say that I have. I mean, I think it’s hard for me to wrap my arms around what is reported because what is typically reported is how many people have tested positive, and it doesn’t seem like people follow the hospitalizations as closely as they should. What really worries me is situations where hospitals can’t take care of the volume of people that need care. I mean, the whole point of the shutdown was to flatten the curve and slow down the virus so that the healthcare system could handle it. There was never any objective that we were going to make the virus go away before we a the vaccine, it’s impossible. So as long as our healthcare system can take care of the people that are getting sick, then we’re okay.

Dean Wehrli:

If this does drag on for a while though, or even the economic impacts of it. Is there a fear eventually that delinquencies will catch up and it might hit the apartment sector more widespread down the road, even next year?

Greg West:

I think it could, but we are seeing in our own business and in the businesses of the folks that live in our communities, it’s moving on and people are working. To the extent businesses were shut down, they’re starting to reopen. So, to answer your question directly, I do see an impact, but I don’t see it as Armageddon. I really don’t.

Dean Wehrli:

So far, has COVID or any, or just current trends, impacted your strategy in what markets you enter, or in what kind of apartment product you’re going to build?

Greg West:

I think it’s probably what kind of properties we build is something we for sure think about. Before the virus, we felt like we wanted to be more suburban or Surban, as John Burns would call it, because of this affordability issue. The amount of housing that was built in the city centers was a bit overbuilt in many, if not most markets. We saw more opportunity in the lower cost environments, the suburbs, but we’re seeing through the virus a better performance of the high-end properties in terms of collections. So, I think there may be an investor bias that gravitates perhaps back to the urban environments, because of that.

Dean Wehrli:

Do you think that’s jobs based, it’s a safer space for them because the jobs are mostly in those city centers?

Greg West:

Yes, I think that’s exactly what it is.

Dean Wehrli:

Let’s wrap this up with what I always do, it’s the crystal ball thing kind of. Of all these impacts, whether they’re market impacts or design impacts, what do you think, if any, are going to have a long term, that are going to stick with us for a while?

Greg West:

Yeah, I think we talked about it a little bit, but the way that we market our units and the way that we utilize virtual selling techniques is for sure a secular change. I think the trends of people working remotely and us having the facilities on our properties to allow people to work remotely is also a secular change. I mean, I don’t think that’s a fundamental abandonment of the office. I just think people are going to start splitting their time more heavily to working at home, from home, than they used to. That’s going to affect how we arrange our amenities and how we cater to that, but fundamentally what we do beyond things like that, I don’t think it changes in a very material way. It’s really more about the, the virus accelerating trends that were already there. It’s making them more… It’s clarifying for us where we need to focus and get better.

Dean Wehrli:

Yeah. It’s interesting that I hear the same thing in the for-sale sector. So, I mean, I know residential is residential, but still, it’s interesting to hear these streams of likely outcomes converging between both rental and for sale. The virtual for instance and the home officing, I mean, that’s going to impact both those spaces in very similar ways.

Greg West:

People are people, whether they own or they rent. Right?

Dean Wehrli:

Yup, yup. I know that seems so obvious, but it’s just interesting to start hearing from different voices, that convergence.

Greg West:

Mm-hmm (affirmative).

Dean Wehrli:

Hey, thank you so much, Greg. This has been great, as I expected it. Appreciate it.

Greg West:

Well, I appreciate you inviting me to be on and thanks to everyone that’s listening in, and my best to everybody. Stay safe and stay healthy.

Dean Wehrli:

Right on, glad to have you. That’s it for now. So until next time, I’m Dean Wehrli, and this has been The New Home Insights podcast, so long.

 

 

 

 

 

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