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Navigating the Short-term Multifamily Rental Market

Brad Korman, Co-CEO of Korman Communities
May 18, 2016

Korman Communities' Co-CEO Brad Korman discusses the evolving nature of short-term apartment rentals

Overview

Executive Summary

Brad Korman understands the value of flexibility. His family's eponymous firm, Korman Communities, was conceived 50 years ago to meet a need for flexible living space – with leases, furnishings, and space in between that of apartments and hotels. Nowadays, flexibility continues to be important, not only to tenants, but for landlords. Tenants – Korman's are mainly Millennials and Baby Boomers – want flexibility to switch jobs, relocate to different areas, and have easy lifestyles, without the hassle of home-ownership. Landlords, Korman says, need to be adaptable in how they market their residences to tenants and prepared to respond to shifts in the industry, such as changes in interest rates or the rise of Airbnb. In particular, landlords need to adapt the marketing of multifamily product to the different ways that Millennials and Baby Boomers shop for a place to live. Baby Boomers search in person for an apartment, by visiting and touring a handful of properties; Millennials search by Internet and phone, and substitute online reviews for personal visits. Sometimes, Korman says, the first time a Millennial sees their apartment is the day they move into it. Owners need a strong sales team, model apartments, and on-site amenities for the Boomers, and a great web presence and videos for Millennials. Landlords also need to be ready to respond to a changing market. Korman expects that "the best of times" for multi-family rentals – due to low interest rates, access to capital, and a slowdown in residential home sales – can't last forever. To prepare, Korman is focusing on fundamentals: good locations, moderate leverage, and listening to his customers. In addition, Korman expects that Airbnb, which currently competes just with hotels, to expand to the temporary housing market. Despite the advantages that traditional apartments have in providing safety and security, landlords need to be aware of how Airbnb is "changing the conversation."

Transcript

Zell/Lurie: We are here today with Brad Korman, co-CEO of Korman Communities. Brad, thanks for talking with us. Brad Korman: My pleasure, Todd. Thanks. Zell/Lurie: Brad, one thing Korman Communities seems to do is blur the line between an apartment and a hotel. Can you tell us about your approach and strategy, and what motivated it? Korman: Well, it actually started about 50 years ago. My father had just finished building an apartment building in Center City, Philadelphia – an architecturally beautiful cylindrical building. But what a cylinder means is that each floor is round, and therefore each unit is pie-shaped. And as they were leasing up the building, it was slow. People would walk through and look at the apartment and say, "Well, if I put my bed here, can I see the TV there?" And it didn't really work. So, my father had this idea to bring in a designer. He wanted to furnish every unit on the floor; not just model furniture that doesn't really fit the unit but full-fledged real furniture. So he furnished every unit on the floor and people started touring through and got a real sense of what an apartment would look like. One day someone came in and said, "This is great. I'd love to lease it with the furniture." The leasing agent said, "Well, this is an apartment. You don't get furniture." My father said,"No, no. You can lease the furniture! Here's the price." Then, someone came in a couple weeks later and said, "This is great with the furniture and the apartment, but I really don't want it for a year. Can I have it for three or six months?" The leasing agent said, "Well, no. It's an apartment. You have to take it for a year." My father said, "No, no. You can take it for less than a year! Here's the price." And it hit him that there was a place for people who needed to be somewhere for a day or two, called a hotel, and a year or two, called an apartment, but nothing in between. So my father started that concept – 50 years ago – about furnishing apartments and putting them in all 25 of our locations and saying, "We're going to have five or ten at one location, and 30 or 40 at another," depending on what the need was. And, "Let's really start giving people a choice: It can be more than just an unfurnished apartment, and it can be less than a year." That was the start and the impetus of the first apartment program really in the United States. He was the first one to do it. My brother and I came in the business about 30 years ago and decided to take it to the next level. Instead of apartment-grade furniture, we went to higher-end. Instead of just Philadelphia suburbs, we said, "Let's expand throughout the country." We said to ourselves, "What if we could take the best of all your housing alternatives" &mdashmdash; the size of an apartment, the finishes and locations of a condominium, the services, furniture, amenities and lease flexibility of a hotel— and put it all together. What does that look like? Why are we limiting people to a box, saying that, "You have to live here for this term, and it looks like this." Let's give people more options, and more alternatives. That's really the program, and it's morphed beyond just corporations and corporate apartments, into individuals who are going through change-of-life scenarios. Whether someone's going through a separation or divorce, someone sold their house and they're spending six months in Florida and three months at the beach and three months in a city. Why not have temporary accommodations that really satisfy all your needs? You get to live as well as you used to live in your home, and now you have flexibility as to how long you're going to be there, and what you have to buy or don't buy. That's really been the concept, and that's been the fun of what we're doing, taking it to the next level. Zell/Lurie: Who are the renters in today's market, and what are they looking for in an apartment? Korman: Renters are Millennials and the empty-nesters. I think in our country, 54 percent of the population of the U.S. are Millennials and Baby Boomers. And those two groups represent probably 80 percent of our renters. They're both renting for the same reason: They want flexibility. The Millennial wants flexibility because they might want to switch jobs, or relocate to a different area, or have a new experience. So they don't want to commit to the home ownership model. The Baby Boomer, the empty nester, wants flexibility in that they've gone through the time of owning their house and mowing the lawn and waiting for the cable guy. They now want the ease of lifestyle. They want the flexibility to relocate if their kids move somewhere else. And they also want to know that they sold their house. The money they have in their pocket is their money. And so the rent is a fixed payment, it's predictable. So they know if they want to do something else, what they have versus buying something, and can they sell it? Will they sell it? How much will they sell it for? All those things are questionable, that they don't want. It's really flexibility that these two groups want. They want it in different ways. But they have that same need. The interesting aspect is how they rent. If you're 50-years-old or older, and you're going to look for an apartment – if I was shopping, I would go and look for a certain area. I'd identify four or five properties I'd like. I'd call or make an appointment, or I'd visit the property and I'd tour the unit. I'd look at a couple different apartments I like. I'd look at the amenity spaces. I'd walk the block to see what's around. I'd spend an hour, hour and a half, on each and I'd spend two or three days looking at these apartments, and then pick one and rent. Our kids? Not at all. The Millennials are picking up their phone, they're punching through. They're looking at the area, they're looking at reviews of how the management company's doing, how the building's doing. They are looking at certain areas, and going ahead and pushing the button and leasing. A lot of times, the first time they see their apartment is the day they move in. As owners of properties, we have to make sure we have great sales people, great model apartments, great amenities on site for the people who are going to touch and feel. But we also have to have a great web presence and great videos because our two biggest sectors are shopping and leasing apartments totally differently. It's a unique way of how we look at the world. But we have to do both really well, because they look at it differently. They want a lot of the same things once they're there. They want the great amenities. They want the great finishes in the apartments. They all want great technology. And these are the things that we're giving. But they go about it differently. Zell/Lurie: So far we've focused on some apartment-specific issues. But your business is not isolated from the rest of the economy. What forces are going to have the biggest effect on your growth and the strength of the residential real estate market? Korman: Well, residential real estate has gone through and continues to be in a terrific time. It's been a great result, a great world for us, starting with interest rates being as low as they've been for a prolonged period of time. There's been great access to capital, both domestic, foreign capital looking at our assets as a safe haven. And there's been a slowdown in residential home sales. So from a multi-family rental experience, these have been the best of times. We're cognizant of the fact that that's going to change. Interest rates won't always stay this low. What do we do to prepare for that? We still are doing deals and developing deals right now that will go into the future, but we're doing it in a way that we think is mindful. We're always going to be focused on making sure that we're doing deals in locations that are not fringe locations, but the best locations we can find. We're making sure that we're using a moderate amount of leverage. You know, 60 to 70 percent. We're not going to take it 95 percent, and if things go bad you're stuck. And we're really going to focus and listen to our customers: where they want to be, the kinds of products they want. I think if you continue to do that, if you really focused on your fundamentals, listening to your customers, moderate leverage, great locations, products that make sense, then I think you'll be fine. I think the world will change – we've been in a really terrific market, that can't go on forever. There's been a real change in the rental market and there are now people who want to be renters; that's a great thing for us. But those things can't stay that way forever. Being focused on those fundamentals, I think, is what we're preparing for, for the future. Zell/Lurie: There's been a lot of talk about how Airbnb might compete with hotels. Do you see concepts like Airbnb also affecting the rental market? Korman: I think so. It's definitely changed the conversation. Just as Stubhub changed the conversation about tickets and Uber has changed the conversation about car services, Airbnb is changing the conversation about temporary housing. Right now it's just affecting hotels. But if you think about it, when Stubhub came in at first, they were just affecting ticket brokers, and then it got into season tickets. Uber was just affecting taxis, and now its limousine services and maybe rental cars. So we look at it and say, "Clearly this is resonating with people. But how's it going to work? How do we regulate real estate?" We've always been taught that when you stay somewhere for a day or two in a transient location in a hotel, you need life safety. You need sprinklers. You have to have exit signs on the doors and in the hallways. And that was deemed an important thing. How does that happen when someone can just turn any building into a pop-up hotel? Is that the way we should be operating as residential owners? Mrs. Smith, who has lived in an apartment for 20 years, and Mrs. Jones for 18, they didn't bargain for that fraternity party on Saturday night because the guy who lives in between them rented out his apartment for the weekend to a party. So, what does that look like from a use and occupancy standpoint? How does it affect real estate taxes? Hotel taxes? Life safety? What are the impacts to the hotel unions and workers who do that? There are a lot of questions that still have to be answered. There are a lot of consistencies that need to be evolved. But (Airbnb's) changing the conversation. So I think we have to work through things. But it's something that we have to be aware of, because it does resonate with a lot of people. Zell/Lurie: Brad, thank you very much for talking with us today. Korman: My pleasure. Thanks, Todd.   (Not an exact transcription of video.)

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