There is little agreement among providers about when the corporate housing industry burst forth onto the world. If one was to compose a mystical tale of origin, it would detail how anguished companies transporting employees around the world yearned for alternate temporary living solutions and, in response, corporate housing sprouted from the ground, slowly maturing until the blossoms were flourishing, and difficult not to notice.
“Corporate housing has been around for a long time, but in more of an informal aspect,” said Doreen Compton, CRP, global account director for BridgeStreet Worldwide, Arlington, Virginia. “I remember 20-some years ago, I worked for Residence Inn, which is owned by Marriott [International, Inc., Washington, DC]. That product was one of the first attempts at saying, ‘Guess what: businesspeople need a little bit more than just a tiny hotel room.’”
The beginnings of individual corporate housing providers are as varied as the locations of their inventory. Some pounced on an emerging market; some were born because of a client need; and in some cases, a particular region had a dearth of temporary living options and required a provider to step in and fill the void.
Oakwood Worldwide, Los Angeles, California, wandered into the furnished apartment business in the 1970s. Late in the decade, the company found a niche market—many of its apartments were not being rented by people but by companies, particularly entertainment companies from nearby Hollywood, where some of Oakwood’s first apartment buildings had been established.
“There was a natural, symbiotic relationship with furnished housing and the transient nature of the entertainment industry,” said Gavan James, senior vice president and general manager of Oakwood Corporate Housing.
In 1988, Northwest Suites, now ABODA, Redmond, Washington, was spun off from a third-party relocation company because of one client’s need. A little company called Microsoft, Redmond, was looking for a cost-effective way to comfortably house the 30 college interns it brought into Redmond every summer. As Microsoft continued to grow and ship in more interns, so did ABODA, eventually acquiring inventory in 40 states, while remaining Microsoft’s sole corporate housing provider.
In the late 1990s, brothers Gary and Steven Brown owned a number of brownstones in New York, New York. The brothers had been involved in the family furniture business, which has been in operation for 85 years. When the real-estate savvy Browns first renovated their brownstones, they installed furniture from the family line and decided to rent them out to an emerging market. Steven Brown had been intrigued by an article he read in The New York Times about corporations using furnished apartments, and thus Furnished Quarters, LLC, New York, began. With its classy furniture and boutique feel, the company quickly acquired more properties in New York, each one filled with accouterments that matched the unique qualities of the neighborhood. The company now boasts the largest corporate housing market share in Manhattan and has expanded its inventory into New Jersey and Massachusetts.
Jon C. Lanclos, who worked as a real estate broker in Houston, Texas, saw a need for alternative temporary living situations because of Houston’s robust local economy. Preferred Corporate Housing (PCH) was started in 1996, offering corporate housing services Texas-wide; in 1998, at its clients’ request, PCH refocused and reorganized its operation nationwide. With service to more than 6,000 domestic destinations, the organization now is looking global.
James considers the early 1980s as when the corporate housing market truly opened up—Oakwood, the largest corporate housing provider, established 30,000 units nationwide. Compton noted that in the 1980s, apartment communities informally would set up short-lease executive suites. In the late 1980s, third-party corporate housing providers—many smaller companies with anywhere from one to 200 units—began popping up in regional markets.
Signifying the increasingly visible role of the corporate housing industry is the Corporate Housing Providers Association (CHPA). Formed in 1996 by eight industry leaders, today the CHPA has more than 300 member companies that represent 85 percent of all corporate apartments in the United States.
“There are many niche operations with 200 apartments or less, and many of those companies don’t have any intention of being large,” said James, who is a co-founder and former president of CHPA. “They just have the intention to be good, and operate with a fair profit and provide good service to whoever their clients are.” Less than ten CHPA members manage more than 1,000 units, he noted.
At its 2007 national conference, CHPA offered the first round of testing for its Certified Corporate Housing Provider (CCHP) accreditation. One hundred and six corporate housing associates signed up to take the exam. The CCHP is the result of years of research and planning, as well as work with Worldwide ERC®.
“The accreditation is a good step for our industry,” James said. “It’s not unlike [the] Worldwide ERC® CRP®, which is a very valued accreditation. We feel it’s the first step in showing the customers and the public in general our commitment to the industry and our commitment to being pros in what we do. It took a great deal of development and time, and it’s something that the industry members are pretty much 100 percent behind.”
Ultimately, the aim of the CHPA is to build awareness and interest in the corporate housing arena. In furthering this goal, the CHPA has been granted a seat on the Worldwide ERC® Industry Advisory Council.
“As an industry, we need to get on the same page, and then I think one of the goals is for us to just get our industry known more,” said Dave Caple, president and CEO of ABODA, and CHPA treasurer. “A lot of people stay in hotels because they don’t know that there’s another option out there.”
From its humble beginnings, the concept of corporate housing has worked its way into the business world’s consciousness, especially in the last decade, as a prominent form of temporary accommodation.
“Over the last seven or eight years, corporate housing has gained a lot more traction—now people know what it is, for the most part,” Compton said. “There are still some companies that don’t understand it…. But I wouldn’t say it’s emerging—it’s here now, and it’s still evolving because, face it: our world is still evolving.”
Tightening Rental Markets
The end of the national housing boom and subsequent real estate slump has created a bullish rental market, according to a white paper written by Oakwood with data collected by REIS, Inc., New York. This is unfortunate for corporate housing providers as their largest cost is apartment rent. Between 2000 and 2005, the U.S. apartment market was lagging, with only six of the 30 metropolitan markets surveyed in the Oakwood report witnessing above-inflation rent growth. Many markets were saddled with rent growth below inflation or negative growth, especially near the beginning of the decade.
According to the white paper, domestic corporate housing costs are forecasted to increase at a rate above national inflation for the rest of the decade, while hospitality demand is expected to remain high and stretch inventory. Some factors affecting underlying costs are increases in energy costs and interest rates, as well as record demand for corporate housing services.
There is a “counter-intuitive” relationship between home markets and rental markets, according to the white paper. In the latest housing boom, renters were abandoning apartments to purchase houses in a “frothing” market; on the other side, multi-unit investors, taking note of poor rental growth, converted apartment buildings into condominiums or built strictly for condo use. Cheap financing and low-interest rates fueled both of these activities.
However, with rising interest rates and climbing home prices, renter-to-homeowner transitions have stalled—purchasing a house is a riskier investment. Hence, rental rates in most domestic markets caught up with inflation, and then surpassed it. In the Oakwood report’s 30 core markets in 2003, rent increases were at 56 percent of inflation; in 2006, they were at 138 percent of inflation. REIS predicted that in 2007 and 2008 rents will increase at least twice as fast as inflation in the general economy.
A housing-price spike may depress rental rates (especially with low interest rates and creative financing), but a slump after a spike keeps renters renting because of the unattractiveness of a declining market and barriers left over from price increases during the boom. Factor in mortgage interest rate increases, less availability of specialty mortgage products (interest-only, zero-down), limited new construction, and increased demand for apartments, and it is clear why corporate housing providers are concerned about an apartment shortage.
“The industry is dependent on the available inventory of apartments at a reasonable price,” James said. “And so as apartment communities remain tight as far as the rental markets, it can shorten the supply of corporate apartments, or it can result in a run-up of apartment rental rates that, in turn, means we have to force up our rental rates to our customers.”
Possibly the best way corporate housing providers can avoid passing steep rental increases onto their corporate clients is by building solid relationships with apartment communities. “We form arrangements that allow us to conserve the cost of apartments as much as possible so we can pass that on to our customers—whether it’s from selecting the apartments properly or negotiating well,” James said.
One example of a tightening apartment market is New York, in which the lack of inventory has caused rental increases, and in step, the cost of temporary housing to rise. In addition, an increasing use of corporate housing combined with the tight apartment market has made for some stressful times in finding temporary accommodations.
“There were points in 2006 where there was absolutely nothing available, no matter which one of my vendors I went to,” said Stephen C. McGarry, CRP, director of global mobility for WPP, New York.
A tight market means longer lead times, James said. However, he is optimistic about New York—a slew of new construction holds a promise of alleviating the strain. In the meantime, James noted that operations in the surrounding areas—Jersey City and Hackensack, New Jersey, and even Stanford, Connecticut—are seeing increased business. The rates are lower than property available in mid-town Manhattan, and public transportation provides a reasonable commute into the city. Furnished Quarters has acquired inventory in Jersey City and Hoboken, New Jersey, setting up lower-priced alternatives to their Manhattan properties.
Several up and coming rental-related challenges are waiting at the corporate housing industry’s door. In certain markets like Seattle, Washington, Caple noted, apartment communities are passing back water and other utility costs to providers that previously were covered by the communities. In addition, they have been charging additional fees to corporate housing providers. Lease terms also are increasing in major metropolitan areas—Caple said that leases shorter than one year appear to be vanishing. Six-month leases are becoming harder to find, while month-to-month leasing is pretty much off the table, according to Caple.
The Trouble With Condos
The trend toward condominium conversions in the last several years has presented a threat to availability of apartments for corporate housing providers. Condo conversions have taken tens of thousands of potential rental units off the market for corporate housing providers. The Oakwood white paper reported that in 2006, nine out of 30 markets had decreases in rental inventory—the other 21 markets witnessed supply pressure. Caple noted that Seattle had a decrease of 2,000 apartments in 2006, which he attributed to a lack of construction and condo conversions.
“When the real estate industry was booming, many owners turned standard, conventional apartment buildings into condos,” James said.
A portion of Oakwood’s inventory is through individual condo owners. However, James said, this is not always an advantageous arrangement for Oakwood or its clients.
“It’s not our forte,” he said. “It’s better for us and the customer to rent 40 apartments from a management company as opposed to one condominium at a time. Sometimes getting the maintenance done at individually-owned condominiums is more of a challenge, and because we have a high regard for our customers, when we have a number of condos, we end up hiring our own maintenance staff.”
Most corporate housing providers agree with James’ assessment—Caple said dealing with 10 owners for 10 apartments is an administrative hassle for a corporate housing provider. Also, many condo owners are not thrilled by the prospect of corporate housing considering the highly transient nature of the business—the idea of multiple people moving in and out over a short period of time and possibly scuffing furniture and floors is not appealing.
Sometimes, if demand necessitates, corporate housing providers have no choice but to seek condos. James cited the example of Miami Beach, Florida, where condo conversions have saturated the market during the last five years. Apartment availability has become very tight and rental rates have risen steadily. It was more conducive for Oakwood and its clients to acquire condos, which were renting for less than apartments.
There are alternatives to dealing with condo owners. In other markets where condos make up a large segment of apartment inventory, corporate housing providers are able to work with the building managers, using them as facilitators in leasing transactions, Lanclos said.
Some operations, however, are bridging the gap between individual condo owners and corporate housing providers. Corporate Housing by Owner (CHBO), Denver, Colorado, was launched in 2006 with 1,200 properties listed online for corporate housing providers and corporations to peruse—not just condos, but also townhouses and other types of accommodations. The owners set stay minimums and receive advice on price structuring and furnishings. In 2007, CHBO President Eric Smith estimates the company will add another 2,500 to 3,500 properties nationwide; by the end of the year, CHBO World Wide will make the operation global.
Smith has found that CHBO has been very effective in smaller markets, but also in areas where the apartment market is tight
“There are condos everywhere you go, and there are not apartments everywhere you want to be,” Smith said.
However, with the softening of several major metropolitan real estate markets, the inclination toward condo conversion has waned. The National Association of Realtors® reported that condominium sales fell 13.6 percent from November 2005 to November 2006—a higher rate of decline than sales of single-family houses.
The Lump Sum Also Rises
The prevalence of lump-sum relocation packages are of concern for corporate housing providers. Temporary housing has a tendency to drop in importance when a lump sum is given. When cash is flashed in front of a transferee’s eyes, most times he or she will take it. However, a transferee is unlikely to understand the function of temporary living accommodations in the relocation process, or know how long it will take to find a new permanent abode.
“I think there is a time and a place for lump sum, but my concern is that gets over-utilized and I don’t know if corporations are really understanding the soft costs of their employees not being able to find… temporary housing that fits their needs,” Caple said.
Pfizer, Inc, New York, uses a lump-sum program for its employees’ temporary housing during relocations. Corporate housing is more of a suggestion than a mandate, said Michael Washbourn Sr., CRP, GMS, manager of global relocation services for Pfizer. While the company conducts research into and develops relationships with corporate housing providers, rarely will it book an apartment for a relocating employee. The relocation department will supply a transferee with a list of approved providers while the purchasing department negotiates rates and products in select markets.
“When you give [transferees] that lump sum and say, ‘Look, you can spend it as you wish, and if you don’t spend it, you can keep the difference,’ they begin to make different corporate housing decisions,” Washbourn said. “If the company was footing the bill, they would probably stay in a five-star hotel or complex, and it would be two minutes away from the office. But when they pay the bill, very frequently they will put up with longer commutes at perhaps lesser-tier residences.”
Since Pfizer’s lump-sum program was launched in 1998, transferring employees have been very satisfied with being able to spend as they wish, Washbourn said, particularly younger employees. In addition, because Pfizer’s lump sum is generous, when renters save on temporary housing, many are able to put a down payment on a house, he said.
The goal of the lump sum is to encourage efficiency in relocations—with lump sums, many employees stay longer in their original locations and are quicker to find permanent housing in the destinations. The lump sum is estimated to be enough for 60 days of temporary living; Washbourn said the average time spent in corporate housing for Pfizer employees was only seven to 14 days.
“They’re really motivated by putting that [sum] in their pocket,” Washbourn said. “When you’ve got an employee who is allowed to stay in that limbo state for too long, I think it tends to impact productivity.”
The program is not very beneficial for corporate housing providers, Washbourn said, and many do not garner a great deal of business from Pfizer, as transferees choose lower-tier temporary living or find alternate options.
“It’s a challenge to provide temporary housing for folks who are in a lump-sum environment,” James said. “Often, people are looking to just pocket as much of that money as possible, and are not always able or willing to spend a portion of that lump sum on full-service corporate housing.”
Oakwood has responded to the prevalence of lump-sum arrangements by offering partially furnished options or excluding housewares. However, James noted that lump sums have a tendency to drive transferees to corporate housing’s chief competitors—studio-style suite hotels.
In general, lump-sum transferees are not a large portion of Oakwood’s business, James said. “We’d like it to be more, but it is challenging for us to unbundle our apartments to go after that business or provide that lower-end product for what is sometimes an inconsistent market demand.”
“Lump sum is a bad word when dealing with temporary housing,” said Jeanne Ann Heiser, CRP, director of national accounts for Korman Communities, Plymouth Meeting, Pennsylvania. “A lot of clients are moving toward the lump sum for temporary housing because they feel it’s more cost effective. But then what you really have to figure out is how that money is being spent—is it really being spent on temporary housing? Or is it money being reallocated to other things?”
According to Heiser, transferees that skimp on temporary housing and save their money do not end up being as effective on the job until they get into their permanent location. She has heard stories of people sleeping in their offices or their cars to avoid spending the lump sum, which cannot help effectiveness when entering a new position.
Terry Mandle, CRP, senior manager—relocation, Sara Lee Corporation, Downers Grove, Illinois, said some of her employees think it will be less expensive if they go out and find their own temporary living accommodations.
“I’ve had employees say, ‘Well, my corporate housing costs this much through the provider—I can rent that same apartment for this much,’” Mandle said. “But then you have to tack on the costs of setting up all the utilities, and how you furnish it. To me, the slightly higher cost outweighs all of the extra administrative work and headaches in setting it up individually.”
Sara Lee has allowed employees to use the benefit provided by the policy for finding their own leases, usually under extenuating circumstances. For some employees who are building a new house, waiting for the end of the school year, or have another reason for stretching out the allowance, this is a better option. But many employees hear the laundry list of activities required for setting up a temporary accommodation, versus having a corporate housing provider e-mail when and where to pick up the keys, and choose the latter option—75 to 80 percent, according to Mandle.
Next month in the conclusion of this three-part series, MOBILITY will examine corporate housing’s growing role in the global market, increased pressure from the hotel industry, and how providers strive to become strategic partners with their clients.
Gavin Dunaway is staff writer for MOBILITY Magazine.