Here’s a puzzler that crossword aficionados may soon encounter: What’s a four-letter word beginning with R and ending with T that affects the lives of apartment dwellers?
If RENT doesn’t fit, the answer is REIT.
An acronym standing for real estate investment trust, a REIT (pronounced “reet”) is a public company that owns and manages real estate. And REITs are buying up apartment buildings at a growing pace. As a result, how those apartments are run is changing, and tenants are seeing and feeling the difference.
Although REITs have been around for several decades, this corporate structure has exploded in popularity in the last few years. Shares of REITs–which also own shopping malls, office buildings, hotels and warehouses–trade just like the stock of any other public company.
Both individual and institutional investors have been snapping up REIT shares, just as they’ve been plunging dollars into other stocks during this long, raging bull market.
Real estate owners and developers looking for an infusion of cash are only too happy to sell out to a REIT, and so the REIT trend has been flourishing.
Currently, somewhere between 5 and 10 percent of apartment units nationwide are in REIT-owned buildings, estimates Jack Goodman, chief economist of the National Multi Housing Council, a trade group based in Washington, D.C. Most of the REIT penetration in the apartment market has occurred since 1992, he says, and there’s no reason to expect that the REITs won’t keep buying properties, unless the investment and economic climate changes drastically, he says.
Apartment dwellers who reside under a REIT-owned roof are paying rent to a big company.
Even though the apartment business is a multi-billion-dollar chunk of the American economy, “heretofore it has been an odd segment of our economy,” says Gregory T. Mutz, chairman of AMLI Residential, a Chicago-based REIT. What’s peculiar about the apartment market, he explains, is that ownership of buildings has been splintered into private partnerships.
Until the arrival of REITs on the scene, this vast portion of the economy had been left untouched by corporate America.
The coming of REITs to the apartment market is good for renters, contends John Kurtz, senior vice president of Charles E. Smith Residential Realty, a REIT based in Arlington, Va.:
“The REITS are larger–and there is a lot of consolidation within the REIT business, making REITS even larger after they merge–and because of their size REITS can offer more to renters at a better costs,” he says. “That’s because we gain economies of scale.”
In addition to being able to purchase paint and other materials at bulk discounts for buildings all around the nation, REITs are pushing to bring more professionalism to apartment managers and other staffers, says Goodman:
“Many of the REITs have in-house training programs, and they are behind certification for different specialties, such as property managers.”
Sandy Rollins, executive director of the Texas Tenants Union in Dallas, takes a different tack, noting that REITs may not be popular with renters on a limited budget.
Public companies are under the gun to deliver profits to their stockholders, and REITs are no exception to the profit-minded mentality of corporate America, experts agree.
To boost revenue, REITs do such things as meter water and utilities that had previously been packaged into the rent, notes Rollins. In addition, rents are ratcheted up to pay for improvements to the properties.
“We have been getting a lot of calls from renters wondering if their rent can rise by $100 a month or so, and our answer is, yes, it can, since we don’t have rent control here,” notes Rollins. “They (the REITs) are getting pretty aggressive on the frequency of rent increases.”
In defense of REITs, Goodman counters that, “REITs sometimes look for properties that may not be well maintained, which they may be able to infuse (with) capital, and then turn the building around.”
In general, notes Donohue, “apartment markets are very fluid; renters have many alternatives. If a renter doesn’t like living in Skokie, he or she can go to Evanston.
“Managers worry a lot about vacancies, so they usually aren’t aggressive about raising rents,” he says. “In fact, rent increases usually are no higher than rises in the consumer price index.”
In Dallas, REITs have a major market presence, notes Rollins, one reason she is hearing such complaints.
Even though the largest apartment REIT is based right here in Chicago–Equity Residential Properties Trust, run by one of the country’s most famed real estate financiers, Sam Zell–the Chicago area doesn’t have as high a concentration of REIT-owned apartment buildings as cities such as Dallas or Atlanta, notes Ron Donohue, director of research for the Hoyt Group, real estate advisory firm, based in North Palm Beach, Fla., which tracks REIT holdings.
In the Chicago area, the REIT phenomenon is most evident in the western suburbs, according to research by the Hoyt Group.
“I have definitely noticed it,” says Kathy Talarek, sales manager of the Chicago Tribune-owned apartment locator service Relcon in Oak Brook. “Many REITs have taken over buildings in the last year.”
The west suburban entrenchment makes sense, explains Donohue, because apartment complexes and renter profiles in that vicinity fit what most REITs target.
“REITs tend to own garden apartments,” he says. “These are low, sprawling buildings on plenty of land. They look for big buildings, at least 200 units.”
The ideal tenant for many REITs is a “renter by choice,” adds Donohue. “These are people who have plenty of money to buy a house if they want to, but they are choosing to rent, maybe because they are short-term transferees.”
Many renters may be totally unaware that they are leasing from a REIT, notes Talarek. But just like the rest of corporate America, a number of REITs want their name to become recognizable and linked with their product–apartments.
That’s why some REITs are out to establish a “brand” or corporate identity. If the branding concept is successful, renters will know they reside with a particular REIT, just as they know they’re vacationing at a Marriott hotel, or eating at McDonald’s.
Chicago-based AMLI is intent on impressing renters with the AMLI name.
“Branding is a very well known and understood concept. We all respond to brands. You can brand anything from sneakers to milkshakes,” observes Mutz. “Branding hasn’t been part of the apartment business because buildings have been predominantly owned by partnerships.
“These partnerships were concerned with the financial and tax structuring, and in many cases they didn’t want to be known to the renter. We feel just the opposite. I am happy to put my name on every apartment building. I want to deliver outstanding service.”
In that vein, AMLI prominently posts a money-back guarantee in its buildings that will allow residents to live rent-free until a repair problem is resolved if it isn’t resolved within 48 hours after the initial complaint.
One very desirable by-product for renters of the branding concept, notes Jeffrey Fisher, director of the Center for Real Estate Studies at Indiana University in Bloomington, is that some of the brand-conscious REITs will allow tenants who are transferred from one locale to another, or who simply want to move into another part of the same city, to move into another unit of one of the REIT holdings, without breaking the lease.
“It’s just as if you’d move from one room to another in the same hotel,” he notes.
Beholden to its stockholders, REITs especially concentrate on beefing up amenities to pump up profits.
Just like walking into a restaurant and having the ability to order from a menu, renters can select Internet or cable access, housekeeping services, secretarial services, and other conveniences, depending on what a particular REIT offers. In addition to a la carte items, notes Donohue, REITs will do their best to impress renters with their efficient service.
“I know of some buildings where they even offer renters coffee as they’re going out of the door in the morning,” he says.
To be sure, the Hoyt Group’s Donohue underscores that REITs are not alone in seducing high-end renters with on-site health clubs, business centers, and a la carte extras; private owners are also concentrating on these amenities to keep the “renter by choice” happy with his lease lifestyle.
Although REITs have mostly avoided wooing the city renter, at least one, Charles E. Smith Residential Realty, is establishing a presence in the downtown high-rise market.
“We just bought McClurg Court, and we also own One East Delaware,” says Kurtz of Charles E. Smith. “We are also building the first high-rise apartment in almost a decade downtown and that is at One Superior Place, which is scheduled to open in mid-1999.
“Our focus has been more urban than other REIT companies,” explains Kurtz, “because we have a history in the Washington, D.C., area, which has one of the highest concentrations of mid- and high-rise buildings in the country.”
Charles E. Smith already, “has a brand name or reputation in the Washington market,” says Kurtz. “We are trying to build up a critical mass of units, particularly in downtown Chicago, as rapidly as we are able.”
