Serviced apartments attract upscale tenants
The luxury segment of the apartment market has been on the rise as high-income millennials and Generation Z continue to be priced out of homeownership.
Nationally, average monthly Class A rents are $660 less than the average monthly mortgage, according to a recent report from brokerage firm Marcus & Millichap. In high-priced markets like San Francisco, San Jose, Oakland, Seattle and Denver, affordability gaps total more than $2,000 per month.
Perhaps it’s no coincidence that these are the markets in which Sentral, a hospitality-focused apartment management company, operates. The Denver-based company, backed by more than $500 million from San Francisco-based Iconiq Capital, has also brought amenities, event programs and a technology-enabled platform to upscale apartment projects owned by other realtors in Miami and Chicago. Austin, Atlanta, Philadelphia, Nashville, Phoenix and other places.
According to the company, 85% of Central’s units are long-term unfurnished rentals and 15% are short-term furnished rentals. It’s also teaming up with Airbnb to help renters rent out their units when they’re away.
Lisa Yeh joined the company as Chief Operating Officer in 2021, after holding senior roles at Essex Property Trust, AvalonBay Communities and CityView. She recently became president of Central. I talked to TRD On the vigilance required to manage apartment buildings in San Francisco, why a 12-month lease may soon be the same as CDs in music retail, and how to create the engagement that luxury tenants crave.
What distinguishes a luxury community from a typical apartment building?
service. They want to know that you know their name and their dog’s name. It’s like the difference between a five-star hotel and a three-star hotel. The physical space can be very similar, but it’s about attention to detail, the people you hire and the services you provide. We’re basically selling a lifestyle, and in order to have that lifestyle, you need people who understand that, can create that atmosphere and be consistent in providing that kind of service.
How was the year? Recession in the rental market in San Francisco Affected by luxury rentals?
I think we’ve all read the news about San Francisco where residents are leaving. With this, demand has been affected and it also requires landlords and property management companies to be more meticulous in dealing.
The main difference between us and other operators is that most of our team has some sort of experience in the hospitality industry. For example, every community has resident events. Most residential communities, they’ll just say, ‘Hey, there’s a resident event. Let me throw some cheese and wine, and then I’ll call it a resident event and ask the residents to participate in it.’
We think that these events are not attractive. When you’re dealing with luxury clients, they want to make sure that, first, you’re not wasting their time, and second, that you have experiences they can talk about, that are meaningful and memorable, and that are sticky, too.
Has the focus on hospitality been missing in the apartment industry?
Hotels do it better. When we as customers walk into an apartment building versus a hotel, hotels have more energy. The moment you check in, they make eye contact. They are happy to see you.
Unfortunately, I think there’s been a movement in the multifamily space, let’s move employment out of the asset. There’s a sense that we think customers don’t want to interact. But what we’ve found is that customers want the option to interact with you. Multifamily builds these absolutely amazing facilities. But you need someone who knows the space to activate it.
I’ll give you an example. Chorus is one of our most luxurious projects — located in SoMa (South of Market in San Francisco). There is a former NFL player who runs the fitness center who also lives there. So he organized the fitness center experience to a different level. Would you rather drive a race car alone, or drive a race car with a NASCAR driver? The experience is completely different.
What about the business model?
The challenge is that hospitality has much lower profit margins than hosting multiple families because of the number of people all together. I asked someone who runs a 300-room hotel how many people work there, and he said about 80, including food, drinks and housekeeping. In a multifamily building, it’s probably eight.
We run the building like a multifamily building, and we’re just trying to get all the benefits and benefits of hospitality, in terms of service and revenue, but with less staff. There is a way to do this where you mix a little of both together. That’s why our buildings are not 100% short-lived, because then you lose that operating margin.
What are the unique factors of rentals in the Bay Area that you don’t see in other markets where Central owns properties?
San Francisco renters are very technology-focused. They want everything at their fingertips. So we have the Sentral app exclusively for residents where a resident can pay rent, make a work order, search for all events and book amenity space. They can even reserve a Tesla rental car if they want. I think renters in other markets want it, but it’s a must in San Francisco at this point.
The other thing is that even though these people go to the office, they often also work partly from home. So how you design a kitchen is obviously important in terms of having the option of having a space to work with. This is not unusual, but is perhaps more pronounced in San Francisco.
We also have private spaces they can rent such as a conference room. So, again, how do you provide all the services they need in one building?
What are the big challenges facing apartment owners?
It’s no secret that interest rates combined with some markets where rents aren’t rising as quickly, or where you’re seeing rents and occupancy decline, have put a lot of pressure on multifamily owners. Some of them have variable debt that has resulted in the need to generate higher cash flow because they cannot pay off their debt.
You can only cut costs to a certain extent, and that’s what a lot of operators will start doing. We advise against doing this because when you start cutting costs, you will start to see rents go down. So our model is about how do we generate higher revenues?
To some extent, these challenges brought us more internal attention because they realized, “I can’t get rid of the assets. I can’t pay off the debt. I have to find another way.”
In the buildings that Central has managed, what is the return on investment for the owners?
I’ll talk about the portfolio as a whole. We can typically see a 5 to 10 percent spike in NOI, and then on top of that if we build on our experiments, it could be another 5 percent spike. Then, with our flexible stay, that could be another 10 percent increase. So it really depends on how much juice is left in each asset. Some assets that are not well managed, we can step in and pay up to about a 30 percent increase in NOI. For some assets that are better operated but we can add certain components to our model, we can see an increase in net investment of 10 to 15 percent.
Typically, our flexible accommodation will be rented, per night, at a 137 percent premium over unfurnished. So, if an unfurnished apartment costs $4,000 a month, the exact same apartment if I could do that overnight, I could probably get about $9,000. This allows owners to get out of certain situations. In California, we should look and consider allowing shorter tenures because this is a mechanism that will allow some owners to generate cash to pay off their debts.
Who are the renters of furnished apartments?
Furniture has become such a cheap commodity that the cost of moving that furniture may be greater than the value of the furniture when its value depreciates. So it doesn’t make sense for a lot of renters anymore. Why would you want to be responsible for moving your furniture? Most damage occurs while moving furniture. Why not have someone set it up for you, and you can move from city to city?
We see that people want flexibility and mobility.
Are there certain markets that are more interested in furnished units?
We have about 1,000 units furnished right now, and about half of them are what we call medium length, which is more than 90 days. These clients are found across the board in almost every city. People just want convenience like, “I just want to sign my lease, and everything’s in it, and I just bring my suitcase. I can stay there three or four days a week, and I can leave, and when I’m done with the lease, I don’t have to worry about Furniture or packing all things.
I think housing is changing. People don’t stay for 12 months. We’ve seen this disruption in music. We all had CDs when we thought we had to have music. Now, I don’t think any of us have any music.
The same thing happens with housing. We have a relationship and partnership with Airbnb that allows us to do that — not in San Francisco because it’s restricted — but in other cities, we see residents saying, “Wow, this makes sense, because not only do I not have to move my furniture, I can get rent paid when I’m not there.” I think we’re seeing people paying attention to the deficiencies in housing.
We’ve seen that some of the pandemic-era hotspots have subsided. What to see in Denver, Nashville and Austin?
We continue to see a lot of interest in Denver. I think Denver is one of those great cities, and it’s in the middle of the United States, so you can have four seasons. We’re definitely seeing a lot of activity there. Our community in Nashville is doing very well. This is more than a passing demographic. Our properties in Austin are also doing well.
We’ve all read in the press that people have moved out of California, but I’ve lived in California all my life, and I’m not sure there’s anywhere else I’d live. I mean earthquakes and fires, I get that, but there’s something magical about the state – especially in San Francisco.