Harvest Creative

Ask anyone who owns a home about a time they wished they rented and they’re likely to tell you about a renovation. Home improvement projects are notorious for being disruptive, but in the end most people are happy with the results.

As apartment owners, our priority is the satisfaction of our residents. After all, happy residents are likely to renew and recommend us. We do everything in our power to provide them with a home that exceeds their expectations. But sometimes, just like when you own a home, your property needs an upgrade.

Renovations must be made. And they don’t always fall neatly into that window of time between leases.

To manage a major or minor renovation while keeping residents calm requires a bit of juggling, but we don’t hire clowns to distract or entertain them. The most important thing we do is provide great communication. People’s willingness to be patient is always expanded when they know what’s going on. That means we must give them clear communication and follow through with what we say. I like to follow the advice Roy T. Bennett gave in his book, The Light in the Heart: “Listen with curiosity. Speak with honesty. Act with integrity.”

Good communication starts with good project planning. The more planning we do up front, the easier it is for residents.

Ideally, we make any project as quick as possible. Quick usually equals less painful.

If quick isn’t possible, the next best case is to figure out how to do a renovation or repair during the turnover between residents.

And then there’s the less desirable but ultimately possible scenario with big projects, especially ones that aren’t just limited to one unit. That’s where our planning and communication skills kick into high gear.

For instance, when we want to retrofit an older building with washers and dryers in each unit, we need to install plumbing throughout the building so the connections are in place to add the machines. If necessary, we can move someone into another unit. But we’ve managed full unit renovations over three or four days with residents in place.

Residents are usually pretty happy when they get their own laundry equipment or a new kitchen. They’re even happier when we help them move their stuff from one space to another in their unit and manage to keep their old refrigerator running somewhere until their new one is ready and they can switch over their food.

While those few days are a little inconvenient, we make it as painless as possible. And when do our communicating right, our residents are just as pleased as homeowners when the work is complete and they can enjoy the results.

It’s natural for business owners – especially leaders of small and regional banks right now – to hum Bob Marley’s “Every Little Thing Gonna Be Alright.” After all, leaders want to reassure stakeholders that they have everything under control. I wasn’t surprised when CEOs of multiple banks claimed that the issues that started with the spring collapse of Silicon Valley Bank are in the rear-view mirror.

But I think it’s naïve for anyone to say the contagion is contained. Economic losses are still on their books. Just the presence of economic loss creates a constriction in capital availability, and whether you force banks to recognize it in one day, over a period of years or you let them pretend it doesn’t exist, it still exists. If a bank is insolvent, it’s not creditworthy. That snowballs and gets out of control.

All these talking heads on TV say everything is fine, the banks are fine. But if enough people in the market believe they’re not, it will become a self-fulfilling prophecy. That’s what a run on a bank is. It’s not necessarily about not having enough cash in the vault. It’s the belief there won’t be enough cash in the vault, and you don’t want to be the guy that finds out.

Our history for the last two decades is that we socialize losses to protect the system. All that does is kick the can down the road. If somebody starts taking some losses in the private sector, that of course would be painful in the short term. But in the long term, I think it would be very helpful.

I doubt that will happen. More than likely, regulators will bring smaller banks with assets between $100 billion and $250 billion back in line with larger financial institutions. These small banks could face capital, liquidity and stress-testing requirements. They could be forced to report unrealized losses on securities, too, but the risk is that this could force numerous banks to raise capital at the same time.

Instead of the government bailing out banks and putting its thumb down harder on these financial institutions, maybe it would be better to allow market dynamics to play out. The banks that took a holistic approach to their investment strategy would thrive, while others who took a gamble that interest rates would stay low forever might fail. At Bonaventure, we work with the same set of information that banks do. Our strategy, to buy assets with fixed-rate long term debt and hold them for decades, works to manage risk in any environment. Maybe if the banks followed our conservative approach, they really could sing a Bob Marley tune.

Some people are afraid of competition, but just like Apple’s Eddy Cue, I think “Competition on anything is good, because it makes everybody better.” But here’s the thing: Some people in the apartment industry are concerned about competition from new single-family homes built specifically as rentals. Not me. I mean, that’s like peanut butter saying it’s scared of jelly.

Apartments and single-family homes are close substitutes, but they’re not perfect substitutes. There’s room for both in the market. Sure, there’s overlap between single-family rentals and apartments, but they’re still different, just like peanut butter and jelly. Sometimes it’s personal preference that you might choose one over the other, but under certain circumstances you might pick the one that’s not your favorite because it’s cheaper. The other things that may drive your decision are the location and availability of single-family rentals versus traditional apartments.

Obviously, both single-family homes and apartments have overlapping characteristics. They both provide warmth and shelter from the cold or the heat. They both have things you need such as electricity and indoor plumbing.

But if you really need to be in a more central location, you’re probably in an apartment. If you’re looking for more space or your own private yard, you’re more likely to be in a single-family rental.

Typically, single-family rentals are in a much more suburban location where there’s lots of land. From that standpoint, these rentals are competing more with single-family subdivisions than they are with apartments. In fact, often the same builders are building the same floor plans for single-family rentals and for-sale single-family homes in the same location. Some of these homes are kept as rentals by the builder, some are sold to real estate investors who rent them to individuals, and some are sold to end-user homeowners.

While single-family built-to-rent homes have been the focus of significant media attention in the last few years, the National Association of Home Builders found that just 7% of newly built homes started in 2022 were specifically for renters and held by builders. That’s not much of a market share, but it is a leap compared to the historic average of 2.7% of new single-family homes built as rentals. In addition, perhaps as much as an additional 5% of new single-family home starts were sold to investors to manage as rental properties. NAHB estimates that 69,000 new homes started in 2022 were single-family rentals – compared to more than 500,000 multifamily starts, more than 90% of which were apartments rather than condos.

To me, that shows apartment developers have very little to worry about when it comes to single-family rentals. Renters can choose peanut butter or jelly but there’s plenty of bread to go around for all of us.

“You will make better decisions once you begin thinking long-term rather than short-term,” a quote from business writer Adam Smith, succinctly sums up the Bonaventure philosophy. One bit of short-term thinking that has an outsize impact on the apartment industry is consumer sentiment. Everybody seems to echo Joey on Friends and ask, “How you doin’?” The thing is, a lot of investors are very emotional, just like consumers. Investors hear that consumers feel good, so they think, “Let’s get this deal started.’ Or they think themselves that the economy is good, so they say, “Let’s get this property started.”

It feels better to get started, but the reality is that the apartment building is going to last for 40 years. How many times is consumer sentiment going to yo-yo during those decades?

Banks are more comfortable providing capital when the economy feels good. But “feeling good” shouldn’t have a strong impact on a developer who plans to own a building for a long time. The emotional state of the financial markets affects whether people will provide capital, whether it’s from bank loans or equity investors, but market fundamentals have an impact, too.

Right now, supply and demand fundamentals for apartments are shifting. Some developers are behind schedule because of the continued shortages of labor and materials. Completion dates are slipping.

Now, normally, that might sound pretty negative, but in my view, this is positive. That’s especially true in certain markets where there’s been a big jump in supply relative to the existing product base. While no one loves the idea of construction delays, it will be helpful to elongate the delivery cycle versus everyone showing up to market at the same exact time with new units.

While that may be healthier in the long run, in the short term this may mean that consumers miss out on a few discounts because people won’t have to compete as heavily on price.

Here’s where that long-term mindset is valuable: even though the lack of concessions is temporarily bad for the consumer, eventually this scenario is good for them. Ultimately the cure for higher rent prices is more apartment supply. Apartment supply will increase when capital providers can predictably project that they’re going to get a reasonable rate of return.

Think about it: if there were a situation where there were mass concessions, that would affect the availability of capital for the next round of starts. On the other hand, if you had a smoother delivery and less price volatility that would likely reinforce to capital providers that yes, we can continue to supply capital to this business. That will produce more housing, which in the long run, is better for consumers – and should make them feel good.

Does anyone else remember that game Tip It? The point of the game is to remove these little discs from a prong, but when you move one, it affects the balance of the whole structure. Regulations on financial institutions kind of work like that, too. If you change the rules on one part, the rest of the organism adjusts accordingly. Financing is a dynamic system, not a zero-sum game.

Right now, financial regulators are targeting non-bank institutions. But shadow banks are a direct reaction to Dodd-Frank, the regulatory cure for the last financial crisis.

With Dodd-Frank, the government disincentivized banks for making certain types of loans. But the need for capital didn’t evaporate into thin air. Developers needed to get a loan from somewhere. So, what do you do when you need capital and can’t get it from a bank? You find a non-bank institution that doesn’t face the same regulatory scrutiny.

If you’re wondering why banks ended up in this crippling situation with their balance sheets, a lot of it was because of those regulations to make sure they didn’t make risky loans anymore. Instead, they were given incentives to buy government bonds.

What happened next is no surprise. Entrepreneurs realized that the market still needs capital, and they figured out a way to provide it without forming a bank that would be under heavy regulations.

The world isn’t static. It would be naive to think that if the government regulates the shadow banking industry, that move would stop people from providing capital for things that may be considered risky.

Unless you literally outlaw certain types of loans, the market will find a way to get capital. If regulatory burdens are added, the business will move elsewhere, maybe even offshore where it’s permanently out of the reach of the regulators.

Of course, any change in one part of the system has ripple effects on other parts, but the effects could be positive for Bonaventure. Unless regulators somehow try to unwind the clock on our 20 years of fixed rate debt, which they have no reason to do, regulations don’t hurt us.

Limitations on floating rate loans or an outright ban of those loans is not going to hurt us, but it’s still going to hurt someone. Other market participants will be less liquid. If there’s less liquidity, that would drive more business out of the conventional channels and then maybe we can be one of those non-bank lending solutions. After all, we’re in the business of solving problems. So, in the end, the tilt towards more regulation of shadow banks is likely to create opportunities that will benefit our investors.

For a lot of people, the word apartment conjures up an image of a high-rise building in a city. After all, one of the most memorable TV theme songs from The Jeffersons show in the ‘70s referenced “Moving on up to a deluxe apartment in the sky.”

But all apartments aren’t in downtown high-rises. In fact, a decade ago, two-thirds of apartments were garden style apartments that max out at four stories. Today, two-thirds of apartments being built are midrise or high-rise buildings. That’s a big shift in a short time.

At Bonaventure, our typical apartments are four stories or less with elevators and surface parking. So, let’s talk about why we’re bucking the trend – and where the trends are headed.

The factors that drive our decisions include population and employment trends that push demand, construction and labor costs, and the cost of capital.

Let’s start with costs. Midrise and high-rise buildings typically cost more to build, partly because they require steel and concrete. Low-rise apartments can be built with wood – as long as they’re four stories or less – which is a less costly way to build. A 2-by-4 is always cheaper than steel and concrete. So why would someone opt for the more expensive way to build? It’s more of a necessity than a choice when you own a smaller piece of land and are building in a more urban area. The cost of land is so high in those locations that it only makes sense to go vertical to get the density needed to make the numbers work.

The ebbs and flows of apartment styles depend heavily on perceived population trends as well as the return requirements of capital. Prior to the pandemic, institutional investors wanted to be in urban gateway markets like New York, Washington, D.C. and Los Angeles.

But now that the pandemic brought on a disconnect between the place you work and the place you live, people can move to suburbs where the cost of living is lower such as in the Southeast, where’s there more land and it costs less. Our sweet spot has typically been garden-style and mid-rise apartments in attractive suburban locations, so we were ahead of the curve on this trend.

It remains to be seen whether apartment styles will shift again, but given the acceleration of construction costs, people will have to find more affordable ways to deliver housing.

That could mean we’ll begin to see more low-rise, lower density multifamily communities, at least in suburban areas. Either way, we’ll stick with our strategy. Our residents don’t need an apartment in the sky, just a home where they know they’re well taken care of and can live the lifestyle they want at a comfortable price.