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A Good Time To Be In Multi-Family

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Article by Christopher Reilly

A quality product, well managed, will attract and retain quality residents.

It is customary to perform some kind of "Year in Review" at this time of each year. It is often helpful to reflect on where you’ve been, especially as our attention is turning to planning for the upcoming year. After all, it is time for that annual exercise we affectionately call budget season.

What started out as a quiet year has thus far been marked with three major crises. I think the only safe thing to say of this year is that the direction of these crises and their resolution is unclear at best. One of my early mentors in business operated under the theory that business cycles roughly matched people’s memories. He put that at about nine years. This particular downturn has recently been described to me "as of biblical proportions." And that "it is an unprecedented reorganization and capital restructuring of the financial system in the history of humankind." So perhaps this cycle is longer than the longest memory among us?

In the middle of a crisis, it’s natural and human to see extremes, almost impossible to see opportunity, and it can be very difficult to remain calm. Yet that is what we are called to do. I’ve been hearing the word professional more and more lately. It’s a difficult word to really define as it’s a combination of judgment, experience, and a person’s character. It is what is called for in a time of crisis. I would add to it, leadership. What is needed today is professional leadership, not panic, not quick fix solutions, and certainly not short term thinking.

We are privileged to serve in an industry that provides one of the three basics required for human survival. We are also in a business that has the charge of maintaining long term assets. Many of the buildings we manage in New England are older than many if not most of us. Our professional leadership in our areas of expertise is needed in this time of crisis.

We began the year with the foreclosure crisis hanging over the economy like a dark cloud. The time had come to pay the price for the mantra that home ownership is an absolute good, no matter what the cost or an individual’s life circumstances and means. A myth was created that through home ownership individual wealth, societal stability and any myriad of social ills would be secured. Some speculators entered the market with the expectation that, at the very least, inflation would bail them out of a risky investment. And sadly, some were quite simply seduced by those who placed generating transaction income above their fiduciary duties. (Just because something is possible to do, doesn’t make it right.) The net effect is now being realized with the increase in foreclosures. The reality that people who could not possibly repay their loans were probably not good candidates as borrowers seems such a simple concept today.

In 2008, we experienced the oil crisis. Prices soared to $4 plus per gallon, the dollar plunged, world wide recession was feared. And then…

Our third crisis, the credit crisis, exacerbated by the institutional players, has at least helped with the oil prices. Terms like securitized, collater-alized, monetized and credit risk swaps have lost the luster of high finance parlance and now sound like dirty words. Deals built on the "greater fool" theory collapsed because that greater fool did not come along to buy the institutions out, credit evaporated, and financial giants disappeared overnight.

And while the rental housing industry is not completely insulated from the woes of the economy, this is a very good time to be in the multi-family business. Over a third of our population are "renters by choice." Renters’ lifestyle is not fueled by home equity loans, and thus the creditworthiness of our customers continues to be strong. Regardless of the economic conditions, housing is a basic need, and when ownership is the less desirable option, the demand for professionally managed rentals can only increase.

Our business model is much different from the financial institutions which sought a high return today at the expense of tomorrow. Institutional quality rental housing offers a reasonable, sustainable return to its investors over the long haul. Transactions occur when there is an opportunity to add value, or realize a gain, and not solely to generate transaction related fees.

So if you are looking for some idea of where we have been, to tell us where we are going, the message is pretty clear. Stick with the basics. A quality product, well managed, will attract and retain quality residents. Betting on a quick upside is a failed formula, we have to make our money the old fashion way – "we have to earn it."

Christopher Reilly, area vice president for Equity Residential, is 2008 president of the Rental Housing Association.

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