Consulting Witten's wit and wisdom

Ronald Witten is something of an anomaly. In an age when many change companies and careers seemingly countless times, he has been with the same firm since 1973. Witten joined Dallas-based M/PF Research, a real estate market research/consulting firm, after graduating from Texas Tech University with a degree in marketing. Five years later, he became the firm's president. Witten has since completed graduate work in economics and real estate at Southern Methodist University.

Founded nearly 40 years ago, M/PF, a wholly owned subsidiary of the Dallas-based intelligence and technology firm RealPage Inc., compiles information on apartment, office, retail and industrial properties. The firm maintains a database of more than 10,000 office, industrial and retail buildings. M/PF also undertakes a quarterly survey of large apartment owners and management companies in more than 50 markets. Clients include developers, owners, lenders, investors, brokers and appraisers.

Witten's insight and the firm's success have made him a frequent and popular speaker at real estate conventions nationwide. He is also a contributing author of two commercial real estate books. NREI recently spoke with Witten about, among other things, the future of the apartment industry.

MM: Overall, on a macro level, where are the nation's apartment markets headed in 2000 and 2001?

Witten: The apartment markets appear to have finished 1999 in stronger condition, generally speaking, than we would have expected as we were looking ahead a year or two ago. As a result of that, entering 2000, we generally would expect to see continued positive performance - not record setting in terms of rent growth, but certainly a situation where the markets are in equilibrium. New starts have been cut back some in the last few months. The economy continues to grow, but a little more slowly. I think that those trends suggest a relatively stable market for the foreseeable future - assuming that we don't have any major shocks one way or the other, such as a bump in the economy to the negative or a major flurry of new construction driven by some unforeseeable new capital source.

MM: Where will the hottest development opportunities be? Why?

Witten: There are a couple of different ways to look at that. Geographically, across the country, the markets that are going to continue in the next couple of years to prove most attractive for new development will be the Southern California markets and the northeastern United States, primarily because those are markets that have still not seen a very dramatic acceleration in new construction. They're a little bit behind many of the metro areas that have been building for a number of years in significant volumes. Most likely, Los Angeles, Boston, the greater New York area, New Jersey and Connecticut will be the most opportune. On the other hand, the obstacles to entry in those markets are high. That's one of the reasons that they're opportune for development. The fact that they're a good target doesn't necessarily mean a developer is going to have a lot of luck penetrating them quickly, either.

The other perspective is probably more of an intra-metro phenomenon, where we're seeing the intown markets becoming more and more attractive not just to people who work there, but who, from a lifestyle point of view, are seeking a richer experience, a little gritty. "Gritty" is a term that I think accurately describes the somewhat more urban experience - still upscale housing but a little more mixture in neighborhood age and quality, close to cultural activities, close to restaurants and entertainment, typically. I think generally - not in just the older U.S. cities, which has of course has been the case for a long time - that in newer markets like an Atlanta, Dallas, Denver and Houston, the downtown or near-downtown locations are seeing renewed activity and quite a bit of success.

MM: Which markets will be overbuilt and why?

Witten: If you looked today, I think that some of the markets that you would probably be most concerned about would be Houston and Dallas. After that, probably the next tier down would include Phoenix, Charlotte, N.C., and possibly Orlando, Fla., or Tampa, Fla.

Fundamentally, what's happening in all of those markets is that we've simply seen somewhat of an overresponse on the development side to very strong demand. All of those markets are growing successfully. Their economies are producing new jobs in sizable numbers. Newcomers are moving in to fill those jobs, and they're renting apartments, but just not enough of them - not as many as are being built.

MM: Are apartment companies more willing to share their data than in the past?

Witten: I think so. Fortunately, at M/PF we've had a great relationship with the industry dating back to the late 1960s. Owners and management companies have shared their data with us, and then we have aggregated it and reported it back to the industry without disclosing individual property information. So, we've had a great relationship like that with the industry for 30 years now. But, I think in general there is a greater willingness to disclose.

I think there is a recognition of a couple of things. One, information for the public apartment companies is more or less available anyway. Number two, I think as the industry has become more institutional in ownership and operating strategy, there's a recognition that the capital markets will treat investments more favorably in the apartment business if there's more full disclosure. There's less of a need to require a risk premium because I don't really know if what you're telling me is correct than if I can look at a third-party source and have confirmation that the information is correct. Therefore, I'm willing to take a little less of a return than I might be otherwise. I think [disclosure] leads to lower capital costs long term, and I think the industry - both private and public - is recognizing that.

MM: Who uses your data and how do you collect it?

Witten: The users of our information are primarily principals, either developers, owners or investors. They may be public companies like REITs, or they may be pension funds, pension-fund advisors, other institutional owners or just individual investors who rely on our information, as does the lending community.

The data that we collect is through a combination of the old economy and new economy. The old means of telephone calls and faxes is still a very important part of our data-collection procedure. Obviously, it has to be accomplished with a great deal of training and supervision. The other, more new-economy methods include e-mail. That's if you're not uploading files directly from property management companies' systems of record. We're doing more and more of that, but that's not moving as fast as we'd love for it to simply because of the lack of standards in the way the data is stored.

MM: Are institutional investors increasing their commitment to investing in the apartment sector? Why?

Witten: For the last several years, we've seen in the surveys of the institutional-investing community that apartments have ranked very close to the top, if not right at the top, in terms of investor preferences for a number of different reasons. I think a few years ago apartments were certainly one of the first segments of the real estate business to recover from the recession of the early 1990s, so there was quite a bit of upside in terms of room to move rents higher and occupancy gains to be had. More recently, once new development was justified again, I think we've seen much better discipline and much better matching between supply and demand than before. As a result, I think we've seen - when you look at cash-flow returns as well as residual value trends - that apartments have outperformed the other sectors. So, I think there's some confidence today that the leaders of the apartment industry are managing their business decisions in a way that keeps apartments a good investment.

MM: How has your own firm grown with the industry?

Witten: Back in 1992, we began surveying on a quarterly basis the large owners and management companies nationwide. We now have quarterly data on about 50 or so metropolitan areas with six or seven years worth of history. It's given us an ability to create some metrics for the industry that have been valuable in terms of same-store rent growth, as well as occupancy levels and trends there. We've taken on during the last five to seven years more of a national scope in terms of some of the needs we've been able to meet. And, I think that's been mirrored on the consulting side of our business, where the site-specific market analysis and development-potential consulting that we're doing is very much nationwide in scope now in contrast to 10 or 15 years ago, when M/PF was largely Texas-focused.

MM: What type of growth has TVO Realty Partners experienced?

Vandenburg: The company has experienced outstanding growth in the number of apartment units owned, specifically in the '90s, where growth in the first few years was 30% to 100% per year because of its relatively small size. Our growth since the beginning of 1994 has been phenomenal - 110% in 1994, 26% in 1995, 21% in 1996, 22% in 1997, and is projected at 21% in 1998. Conversely, our financial growth has also been outstanding and has produced above market results.

MM: Is the company where you want it to be? If not, how do you plan to rectify it?

Vandenburg: While we are very happy with TVO Realty Partners' performance and position in the marketplace today, we always strive to be better positioned and [to] perform at a higher level. At the present time, we are seriously contemplating the change from an asset-by-asset partnership acquisition structure to a private real estate operating company in which to operate in the future. By consolidating our operations into a single operating company, we expect to gain greater efficiencies and gain greater access to institutional capital and operate in a more cost-efficient manner than presently exists.

MM: What was the most challenging part of last year's merger?

Michaux: In five years, we would like the company to be a highly recognized and respected apartment operating company within both the apartment industry and institutional investor community. As a privateoperating company, we believe that we will be in a position to significantly grow the company through portfolio and corporate acquisitions. Being a private company at this time should allow us the opportunity to secure efficient growth capital to take advantage of changing market conditions.

MM: Has TVO acquired or merged with another company since the company was formed?

Vandenburg: We have not acquired or merged with another company since TVO's inception.

Oep, you've heard it time and time again. The multifamily industry is booming and multifamily leaders are kicking butt and taking names.

Acquisitions and mergers are happening all over the country, and companies are racing to partake in the craze. And those who aren't exactly running are gearing up in hopes that they won't be left in the dust.

One of these such companies' CEO and chairman, Wayne Vandenburg, went on the record to speak with Multifamily Monitor to tell of the company's growth, future endeavors and its part in a competitive market. And believe you me, TVO is wearing its running shoes.

Chicago-based TVO Realty Partners, an affiliate of TVO Real Estate Services, serves as a principal in the acquisition of domestic and international income-producing and opportunistic real estate assets. With its institutional partners, the firm plans to acquire an additional $300 million in real estate assets during the year.

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