CHBO Property

Corporate-Housing Sector Reports Double-Digit Revenue Growth in 2006


Even as the corporate housing industry saw apartment stock disappear through condominium conversion, the sector posted double-digit revenue growth last year.

A recently released report by the Highland Group, a consulting company for the corporate-housing industry, predicted the industry will record a 23 percent revenue growth to $2.46 billion in 2006 when the fourth-quarter numbers are tallied, up from $2 billion in 2005.
The industry experienced 12 percent growth from 2004 to 2005 in the 34 metropolitan statistical areas reporting, according to the report. The past three years have been a boon to a sector that tends to rise and fall with the general economy - much like the hotel industry - and was hit hard by the 2001 recession.

"The demand for corporate apartments is back to pre-Sept. 11 levels, if not higher in many markets," said Gavan James, a senior vice president and general manager for Los Angeles-based Oakwood Corporate Housing, the largest corporate housing provider.
The majority of the corporate-housing supply comes from businesses that lease a percentage of the units in an apartment community from large real estate companies for their employees.
The largest companies in the sector are Oakwood, BridgeStreet Worldwide, Marriott ExecuStay and Equity Corporate Housing. Corporate-housing companies then furnish the apartments, stock them with linens, dishes and silverware and rent them out for 30 days or more to employees on temporary assignment or to people relocating. Corporate housing typically serves as an alternative to hotels.
Even as the economy improved and businesses expanded, inventory had been decreasing in 20 U.S. cities, including San Diego, Los Angeles, Miami and New York, as condominium converters targeted the same Class A apartment properties from which corporate-housing companies lease blocks of units, James said.

Los Angeles is the second-largest market for condominium conversions with 5,757 units, following the Washington/Baltimore market, which has 6,595 units, according to the Highland Group's report.
That tide is beginning to turn, however, as the housing market has slowed and interest in condominium conversion has waned, drawing investors from those sectors.

"They have realized the value of operators like Oakwood taking condo stock. It also gives us short-term rental stock," James said. "As the demand picks up on condominium sales, they can phase out a lot quicker than from conventional renters."
The average stay in a corporate-housing unit was 82 days in 2005, according to the report. Renting units for the shorter time period than the typical one-year lease gives developers more flexibility to sell units in this environment.
This might be particularly helpful in California markets like downtown Los Angeles, where absorption has slowed but prices continue to appreciate, if ever so slightly.
Absorption in downtown Los Angeles slowed to 55 days in August 2006 from 39 for the same period in 2005, according to the most recent update of the Condosource report.
Figures from the California Association of Realtors, which include single-family homes as well as condominiums, show that even though home sales in California decreased by 22.2 percent in November, the median price increased 1.4 percent, year-over-year.
"After fairly steep declines in sales during the first half of the year, the market appears to have stabilized at about 450,000 sales on a seasonally adjusted annualized basis," said C.A.R. President Colleen Badagliacco.

"The median price is holding steady in the $545,000 to $555,000 range, and increased just 1.4 percent last month compared with a year ago." Although the Highland Group reported a 12 percent growth in inventory in 2005 and is anticipating a 15 percent gain when the numbers are all tallied in 2006, James said the industry was becoming concerned about the potential shortages of available rental units in markets most impacted by condominium conversions.
"For the last two years, condominium conversions did lower the supply of apartments," James said. "It was definitely an issue on our radar screen. While the issue remains, because of the softening in the housing markets the issue is diminishing."
The slowing housing market has resulted in fewer apartment buildings being converted, and slowed condominium sales have allowed some of the units to come back on the market as rentals, he said.

"We also have great faith in the American real estate developer," James said. "As apartment supply dwindles, real estate developers tend to start developing." Expanding the Sector The corporate-apartment sector morphed from the lifestyle apartments introduced in the 1970s by companies like Oakwood that were the first to provide extensive amenities like tennis courts and pro shops with fitness centers. It made a natural transition for those fully furnished apartments that didn't require a lease to grow into the corporate-housing sector, James said. With the exception of 17 properties managed by Oakwood, the company and its competitors lease anywhere from 5 percent to 100 percent of an apartment community for corporate housing, he said.
The average rent for an Oakwood apartment is $105 per day as opposed to the $200 per day a standard hotel charges in many markets.

The sector is doing so well that a husband-and-wife team based in Denver, Colo. started an Internet company, Corporate Housing by Owner, nine months ago to capitalize on the growth.
Kimberly and Eric Smith, formerly based in San Francisco, had been working with private investors to provide corporate housing through their company AvenueWest since 1994. Through that company they manage 100 to 200 corporate-housing properties in San Francisco, Denver and Colorado Springs.
"We would take on Class A furnished rental properties in markets in which we were licensed as real estate agents," Kimberly Smith said.
"We were getting calls from people who knew what we did, saying could you manage this property in this location and we would say 'no' or could you manage this property it's B minus, and we would say, 'no,'" she said.
The calls they were receiving made them realize that while corporate housing has typically been geared to mid- to upper-level business travel, there is demand for housing at other ends of the spectrum, she said.

So they launched the Web site, which lists 800+ privately owned dwellings throughout the country to fill that gap. It provides information for investors who are thinking about renting out their property as corporate housing.
"There are huge needs by the insurance industry and tens of thousands of traveling nurses nationwide," she said. "We broadened the spectrum from a geographic and investment standpoint. It still can't be Brady Bunch or like a college dorm though." Since most corporate housing is one- or two-bedroom, the Smiths see the new Web site as an option for people who want to bring their families.

For example, NBA superstar Allen Iverson uses corporate housing while traveling, often with family in tow. "Allen Iverson wants an over-the-top housing unit, but he has to accommodate his four children and two adults, so he needs something larger than the typical corporate-housing stock," she said.
The majority of the properties advertised on the site are from investors who own one to 10 properties, she said. An annual listing costs $395 a month.

The Smiths have been adding one city a month since the Web site launched nine months ago. It already includes listings in San Francisco and several other cities. They expect to add Los Angeles and San Diego early this year.


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