The State of the Industry.

THE DEVELOPMENT OF CORPORATE HOUSING AND THE EVOLUTION OF THE REIT MARKET SET THE TRENDS

In the past few years, two distinct trends have evolved within the apartment industry. First, the demand for corporate housing has increased, spurring this segment of the industry to become much more visible, with many more multifamily housing providers beginning to join in. Second, apartment real estate investment trusts (REITs) have begun to make up a bigger portion of the largest companies in the industry.

CORPORATE CULTURE

"Although many property management firms have been involved with corporate housing for many years, demand for it has increased recently," says Mary Beth Marshall, regional vice president of Summit Properties, Inc., Charlotte, North Carolina, and NAA's 1999 president. "Third party providers, such as Oakwood and ExecuStay, have fueled this growth."

Experts agree that the reasons for this expansion and growth of the corporate housing market are simple: the larger number of business travelers, the growing domestic and international relocation industries, and the increasing mobility of households. All of these factors have combined to increase the demand for corporate housing, and the apartment industry has responded. In fact, many multifamily housing firms have found that this niche market can generate enough or a premium in rent from short-term leases to allow for the furnishings and services for corporate units.

"This niche can be very lucrative for the apartment industry," says Marshall, "because we have expertise in serving the residents and we are equipped to meet this demand much more cost effectively than the hotel industry, thus providing more competitive rates to our clientele."

Although the company has provided corporate apartments since 1986, Avalon Bay, based in Alexandria, Virginia, is definitely stepping up its involvement. Avalon Corporate Apartment Homes, based in Columbia, Maryland, the company's corporate housing division, provides 75 corporate apartments among 10 communities in the Washington, D.C., metro area.

"We provide everything from phone, utilities, cable, furniture--just like a hotel room," says Mark Dewey, portfolio manager for Avalon Corporate Apartment Homes. "You just need to bring your suitcase, and that's it."

With minimum stays of 30 days (if stays were for fewer than 30 days, the company would have to pay hotel taxes), clients generally stay a minimum of 60 days, says Dewey. At Avalon Crescent in McLean, Virginia, for example, monthly rents range from $2,200 to $3,100 for corporate apartments. Avalon's corporate apartments are all located on Avalon Bay communities. This way, the amenities available on the community are available to corporate clients.

Avalon competes for corporate clients with extended stay hotel companies such as Marriott Residence Inn and third party providers such as ExecuStay and Bridge Street, says Dewey.

"The difference between them and us, is that we control the product," Dewey says. "These are our communities, and we won't allow certain competitors into our communities. We control the location. ExecuStay and Bridge Street sublease out of other communities."

While extended stay and third party providers have the advantage of national marketing programs, Avalon does a lot of local marketing designed to attract certain businesses, specifically companies that have office space in the locale, but not necessarily national companies that ExecuStay and Bridge Street might target.

"There is an increase in demand," says Dewey, "but the market is definitely getting smarter. Business travelers have always gravitated towards Marriott Residence Inn, but now they know that there is a different option out there."

And options there are. Two years ago, Network Publications, based in Atlanta, Georgia, one of the largest publishers of real estate magazines, including Apartment Blue Book, began researching a new publication dedicated to corporate housing. Corporate Choices--launched nearly one year ago to meet the needs of both those needing interim housing and those needing to market interim housing--is loaded with corporate housing listings covering 120 metro areas in nine countries.

The corporate housing niche is growing so fast, says Corporate Choices Senior Managing Editor Gary LeFeuvre, that estimates of how many companies are now involved would be inaccurate. More are springing up all the time, he says, both third party companies and property management firms.

"There are a lot of third party providers, but they are not in the property management business," says Janet Appling, vice president of Post Corporate Apartments, a division of Post Properties, Atlanta, Georgia. "They will lease apartments from XYZ Management Company, but they can't have the support of the on-site staff like we do."

Post Corporate Apartments has been providing corporate apartments for 13 years, with 300 units in 22 properties in Atlanta, Nashville, Orlando, and Tampa. The company grew 40 percent in 1998 by expanding into other cities and expects to continue growing.

Like Avalon Bay, Post sprinkles its corporate apartments throughout its communities. Post uses a central office to manage the corporate units in each city. Having a good team and a good relationship with the on-site teams on each community is crucial, Appling says.

"With minimum stays of 30 days, you could possibly have that apartment turn over 12 times a year," says Appling. "It's almost like running a suite hotel that spreads over 100 miles."

REIT REVOLUTION

Apartment REITs now make up about one-fifth of the REIT universe, according to Jay Hyde, a spokesperson for the National Association of Real Estate Investment Trusts, based in Washington, D.C. As of late last year, there were 32 apartment REITs trading on the New York Stock Exchange (NYSE), the American Stock Exchange (ASE), and the NASDAQ National Market System (NASDAQ).

In fact, publicly traded REITs owned roughly 824,000 apartment units (a 28 percent gain from a year earlier) and owned 5.1 percent of the nation's rental stock at the start of 1998, according to the National Multi Housing Council (NMHC), Washington, D.C. In 1991, REITs owned only 1 percent of the nation's rental stock.

"Even though REITs are still no more than 11 or 12 percent of apartment ownership, they have put the whole industry in the spotlight," says Jonathan Kempner, president of NMHC. "The coverage that they get from Wall Street has put private companies in the spotlight, too. Providing the quarterly reporting and information flow is quicker and more extensive, effecting everyone's decision making."

For example, because these reporting requirements make it possible for the industry to react and adjust, an event like the overbuilding of the `80s could possibly now be avoided.

"I think the REIT structure is more intense, with Wall Street expectations, quarterly reporting, and the overall intensity on performance to investors and shareholders," says Marshall of Summit, an apartment REIT.

REITs are very professionally run organizations, says Kempner. They are very efficient, and as they take on a greater share of the industry, the level of professionalism in the industry will increase accordingly, he says. While much of this is intangible and the stampede of new REITs has probably pateaued, it is an important trend, and one that will likely continue.

RELATED ARTICLE: PUBLICLY TRADED U.S. APARTMENT REITs

Ambassador Apartments, Inc., Chicago, IL (NYSE: AAH)
Amli Residential Properties Trust, Chicago, IL (NYSE: AML)
Apartment Investment & Mgmt. Co., Denver, CO (NYSE: AIV)
Associated Estates Realty Corporation, Richmond Heights,
  OH (NYSE: AEC)
Avalon Properties, Inc., Wilton, CT (NYSE: AVN)
Bay Apartment Communities, San Jose, CA (NYSE: BYA)
Berkshire Realty Co., Inc., Boston, MA (NYSE: BRI)
BRE Properties, Inc., San Francisco, CA (NYSE: BRE)
Camden Property Trust, Houston, TX (NYSE: CPT)
Charles E. Smith Residential Realty; Arlington, VA (NYSE: SRW)
Cornerstone Realty Income Trust, Richmond, VA (NYSE: TCR)
Equity Residential Properties Trust, Chicago, IL (NYSE: EQR)
Essex Property Trust, Inc., Palo Alto, CA (NYSE: ESS)
Gables Residential Trust, Atlanta, GA (NYSE: GBP)
Grove Property Trust, Hartford, CT (ASE: GVE)
Home Properties of New York, Inc., Rochester, NY (NYSE: HME)
Irvine Apartment Communities, Newport Beach, CA (NYSE: IAC)
Lexford Residential Trust, Reynoldsburg, OH (NYSE: LFT)
Merry Land & Investment Company, Augusta, GA (NYSE: MRY)
Mid-America Apartment Communities, Inc., Memphis, TN (NYSE: MAA)
National Income Realty Trust, New York, NY (NASDAQ: NIRTS)
Oasis Residential, Inc., Henderson, NV (NYSE: OAS)
Post Properties, Inc., Atlanta, GA (NYSE: PPS)
Presidential Realty Corporation, White Plains, NY (ASE: PDLA)
Presidential Realty Corporation (Class B), White Plains,
  NY (ASE: PDL B)
Roberts Realty Investors, Inc., Atlanta, GA (ASE: RPI)
Security Capital Atlantic, Atlanta, GA (NYSE: SCA)
Security Capital Pacific Trust, El Paso, TX (NYSE: PTR)
Summit Properties, Inc., Charlotte, NC (NYSE: SMT)
The Town and Country Trust, Baltimore, MD (NYSE: TCT)
United Dominion Realty Trust, Inc., Richmond, VA (NYSE: UDR)
Walden Residential Properties, Inc., Dallas, TX (NYSE: WDN)

List courtesy of the National Association of Real Estate Investment Trusts' Web site as of January 6, 1999.

Oetjen is executive editor of Units.