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Leasing Up in London - Familiar Challenges in a New Multifamily Market

Posted by Dom Beveridge on Feb 19, 2019 8:04:00 AM

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IMG_5617Last week I was in London – the city where I grew up and spent most of my formative years. I have never used trips home to view multifamily real estate, but this time was different. A couple of weeks ago at NMHC Annual, I attended the session that provided an overview of London’s Wembley Park project. With that presentation still fresh in my mind, I couldn’t leave my home town without taking a tour of the development.

For those unfamiliar with the project or its locale, Wembley is home to England’s national soccer stadium. It is familiar to most people as a concert venue, the home of the annual FA Cup final, and the iconic site where England won the World Cup (in 1966). Although it is not far from central London, all paths lead to the imposing stadium that dominates the whole area. Crowds arrive for the game or concert and then leave – or at least that’s the way things used to work. Today a revolution is underway that will change that forever.

Inventing a Neighborhood and an Industry

The Wembley Park project is exciting for a number of reasons. First of all, it includes 7,000 units of high-end, high-rise residential real estate. Having grown up in London that’s a jaw-dropping idea. Stadium aside, Wembley was an unlovely suburb in which relatively few denizens of London aspired to live. You’d pass it on the North Circular (the Northern half of London’s “inner loop”) but would seldom linger.

That looks set to change. A vibrant neighborhood is developing around the residential buildings. Shops and restaurants have already experienced an upgrade with much more to come. A collective of 26 affordable studio spaces has been created to attract “artists, designers and makers” to Wembley Park. Twenty-five different varieties of trees are to be planted around the area, along with other green spaces under development on the 85-acre site.

However, in addition to the excitement of one of Europe’s largest urban regeneration projects, a bigger trend is at play. Extensive marketing of the project (I saw it all over North London during my brief visit) promotes not just Wembley Park, but the concept of multifamily. Prospects and residents in American cities have long been accustomed to shopping for apartments amongst providers who offer a resident experience. For Londoners, used to evaluating apartments as location, bricks and mortar, this is a new and exciting idea. Experience-obsessed millennial and Gen Z renters appear to be taking note.

Communication is Key to Big Lease-Ups

While the marketing of this transformational project is exciting, the revenue management decisions are potentially daunting. 7,000 units is a lot of apartments. Think of the challenge of a regular ~350-unit property, where failure to lease-up within the first 12 months results in renewals competing with new leases. Revenue managers aspire to avoid the “terrible twos,” but in huge properties, it’s inevitable that you will end up competing with yourself in year two. The question is how to plan and prepare for that scenario.

First, revenue managers must avoid lease-up pitfalls. Floor plan groupings, for example, are critical to lease-up success. When executed imprecisely, the results are not only suboptimal pricing decisions but also broader distrust in revenue management at the affected property. We have seen many examples where poor initial set-up compromises results and ultimately leads to bad remedial steps, like off the books concessions or careless amenity adjustments. Large properties need a particularly systematic approach to amenity adjustments to avoid the risk of becoming a bandaid fix to broader operational problems.

In a new market like Wembley Park, neither the property nor the submarket has history, historical demand patterns, an observed leasing pace or a proven “market” rate. There will be surprises, so revenue managers must learn to be both nimble (to the extent it makes sense) and patient, avoiding drastic over-correction and learning to be confident in their pricing decisions.

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At this point, smart revenue managers can delve into their bag of tricks. Leases with long and extra-long terms, for example, can help stabilize the asset and minimize renewals competing with brand new inventory. Actively managing make-ready dates also becomes critical, since construction schedules can change as delivery dates inevitably get pushed.

Revenue Managers can’t change make-ready dates, but they can certainly plan for them. With a large number of units to lease, operators must avoid both pre-leasing homes with incorrect ready dates and padding dates too much. It also helps to know the financial strategy of the developer. Whether it’s a long or short-term hold plays a big part in determining how patient a revenue manager should be. Most importantly when revenue managing large lease-ups, we must remember that communication and flexibility are even more crucial than usual to ensuring good decisions.

Multifamily Changes Cities – Even Really Big Ones

I left Wembley Park and got on A Jubilee Line train towards Stratford. Stratford – in East London – is a few miles from where I grew up. It was economically depressed for as long as I can remember until it became the site of the 2012 Olympics. Today – after an enormous regeneration project – it is home to more than 2,000 multifamily units created from the buildings that formed the Olympic Village.

Today young professionals ride the Jubilee Line (itself a relatively new addition as it was extended to Stratford in the late 1990s) to high-paying jobs in London’s burgeoning Docklands area and West End. The center of London has been pulled eastwards over the last decade. Wembley Park will provide the city with another hotbed of creativity and culture, as well as precious housing stock. If I’m not mistaken, London and the UK are catching the multifamily bug.

 

 

Topics: Revenue Management, pricing and revenue management