Randall Lewis Turns His Attention To Multi-Family Rental Market

Randall, the Lewis Group of Companies has essentially morphed from constructing single-family homes for the last five decades to developing planned communities, shopping centers and multifamily communities. Elaborate on this evolution, and what's now under development by your companies.

We were primarily known as a homebuilder for the last almost 50 years, but we always also developed planned communities, apartments, and shopping centers as a part of the business. When we sold the homebuilding operations to Kaufman and Broad, now KB Home, we decided to focus our activities in these three other areas. The Lewis group of companies is a trade name for numerous separate privately held entities. Today we do business under several names-the three most recognizable names are Lewis Investment Company, Lewis Retail Centers and Lewis Apartment Communities. Lewis Investment Company has over a dozen master planned communities currently being developed, totaling over 30,000 single family or multifamily dwelling units. Lewis Retail Centers is responsible for our shopping center development-typically, we are working on approximately a dozen shopping centers at any given time. Lewis Apartment Communities is responsible for the development and management of the Lewis multifamily portfolio. It's a nice synergy because the business plan for the master planned communities is to sell lots to homebuilders, keep the corners for shopping centers, and keep the appropriate sites for the apartments. So, of the shopping centers or apartments we're going to develop in the future, about half will stem from our planned communities.

In terms of the multifamily development, we've made a major commitment. We've developed over 7,000 apartments in the past, and we've found that it was a good business for us. We felt that the company's acquired skills and our homebuilding experience would position us well in the multifamily market-you still buy land, you work with market researchers, you design the buildings, get them entitled, then you build them, market them and own them.

The kinds of multifamily projects we will develop will be at both ends of the spectrum. We will be doing a lot of suburban apartments, typically with market rate rents from $1,200 to $2,000 a month. At the other end of the marketplace, we plan to get involved in some affordable developments-we haven't done any yet, but we know it's a market opportunity and it's something a lot of cities are requiring.

Let's turn to the market rate apartments your developing. What is the opportunity?

The market rate apartments we're doing really fall into two categories. The first will be smaller apartment communities that will be anywhere from 150 to about 300 apartments. We're typically going to build these in suburban areas, cities like Rancho Cucamonga, or Roseville, or Reno-areas near job centers, but not urban infill communities. They're typically going to be at what in today's world would be mid-range densities. They'll be anywhere from 15-23 per acre, primarily two-story with a few three-story elements in them, but primarily two-story. So far, we've built two of this type of community-both in Rancho Cucamonga, that have done extremely well.

One of the surprises for us with these apartment developments has been just how strong the rental market is and how high the resident incomes are. On our two newest communities, our resident incomes have been averaging about $75,000 to $80,000 a year per household. And so, we're getting a lot of renters by choice-people who are perfectly capable of buying houses and deciding, for one reason or another, that they would rather rent. We're also getting the more typical renters who are on the road to home ownership. But, we've seen some real shifts in the demographics and motives of why people are renting. We've been surprised by the number of people who view renting as a good alternative to owning a home.

The other type of apartment development we're doing is a line of multifamily lifestyle communities we're calling "Homecoming." We're going to build seven or eight Homecoming communities, and we're treating it like the launch of a consumer product. We're using the same name and the same collateral material for each community, but we're customizing each Homecoming to each location. The first Homecoming recently opened in Riverside County and we've broken ground on the second one in the City of Sacramento. There are also plans for Homecoming communities in Rancho Cucamonga, Chino, Ontario, and Loma Linda-all in California as well as one in Reno, Nevada.

What distinguishes Lewis "Homecoming" planned developments from standard apartment communities? How do the amenities offered in these developments address a void in the market?

The first element that makes a Homecoming a Homecoming-and there are quite a few interesting twists-is that they are larger multifamily lifestyle communities. We've got two that will have just under 500 for rent townhomes and villas, but most of them will be in the 600 to 750 range-which is on the large side for a multifamily community. The second is that Homecoming projects will have two to three different product types, compared to the typical rental community that would only have one type. The product types are like a market segmentation, offering some pretty distinct lifestyle choices for our customers. A third common element is that they have very large clubhouses. Our first Homecomings have clubhouses that are 14,000 square feet, which is extraordinarily large for a rental community.

The next common element will be the level of services offered. Within the clubhouse, we've got a 24 hour business center, a 24 hour professional quality gym, a community room, a library, a billiards room, a hobby/crafts room, and a game room for children's activities. We're also going to have a lifestyle director on staff just to do programming for the community. We went all over the country looking at retirement communities and giant apartment communities and resorts. We learned that renters and homebuyers alike are looking for a lot more than just four walls-they are looking for a lifestyle. It might be recreation, telecommuting, privacy gates, or educational and social programs, but we're beginning to see that these types of services appeal to a lot of customers in master planned communities and rental communities.

As a homebuilder, we were seeing that pricing pressures on new homes were growing and growing. As housing was going up in cost, it was forcing more and more people to make these decisions: "Do I rent or do I buy?" In some cases many said, "I could buy, but I might have to drive an extra 30 minutes or an hour to work." A lot of people appear to be saying, "I'm not sure I want to do that." We saw the house prices forcing a lot of people out of the for sale market, and lifestyle and demographic choices putting a lot of people into the rental market, and then this desire for community recreation and amenities. So, that's how we evolved to this concept we call Homecoming.

Randall, expand on why you chose not to do urban infill housing. What are the market forces that make such development unattractive for Lewis?

In the ‘80s and early 90s, we did as much infill as anybody in Southern California. We did infill communities in Covina and West Covina, Azusa and La Puente, Palos Verdes, Hawthorne, Carson, and in the San Fernando Valley. Of the major homebuilding companies, we were one of the first ones to recognize the real potential of infill and we went after it very hard.

As the years went on, other competitors started using up the easy sites-the drive-in theater that was about to close, the elementary school that was being closed because of changing demographics-and a lot of excellent infill sites were used up. After the recession of the 90s and the sale of our homebuilding company, we were left to re-evaluate our participation in the infill market.

Today, there are a couple of challenges when looking at the infill market. As I said, a lot of the easy sites are gone in the L.A. marketplace. A second challenge is that the infill market has been discovered-there are a lot of very smart players going after infill projects. Whereas before, we might have had to compete with two or three companies, now, if there's a good infill site, it's not uncommon that you compete with ten companies. A third challenge to us is, as a company, we are comfortable with certain kinds of densities and products. We're very comfortable building two-story products and three-story products. We're not yet comfortable, and I don't know if we ever will be, doing high-rises. And, we're still wondering about some of the mid-rise projects. It's not a business we understand. That's why increasingly we've been shying away from infill-good sites are harder to get, there are more competitors, and the kinds of products that make the most sense today aren't the kinds of products we're yet comfortable developing. Therefore, we will do infill in the future, but only if it is on a site where we can do an excellent job.

As you know, smart growth has been touted for years as the best approach for overcoming NIMBY resistance to more density and sprawl. As a practical developer with major responsibilities for shelter production, not only in this state but others, what are the challenges developers face when proposing smart growth development?

The challenge for us in terms of doing progressive communities in our markets is that there are a lot of hurdles to smart growth. One of the hurdles is the politics. We see that you have to go through an education process at a few different levels. Certainly at the developer level-if you're going to try some of these new concepts in development, you need to get builders to understand that there are places where it makes sense. And, if you're a developer of master planned communities, your first customer is the homebuilder or apartment builder or shopping center tenants and they must be educated.

A second need for education on the political side of smart growth is with some of the political leaders. If you're a city councilperson who comes to a development meeting and hears that smart growth makes sense and two weeks later finds 300 citizens in the audience protesting approval of a project, that's a tough position in which to be placed. So we've been working in our marketplaces, and a lot of the better developers are, on trying to do some education programs for elected leaders.

There also needs to be education at the next level, with the staff people in the cities or counties that are making some of the planning and entitlement decisions, including the planning commissioners. These people are not dealing with the politics, but they've got to deal with the very technical issues of smart growth. Are narrower streets good and in what situation? How do you deal with trash? How do you deal with safety issues? There are some great solutions to all of these problems, but if you're dealing with a traffic engineer who simply doesn't want narrow streets, you're going to have a lot of problems unless that person has been exposed to innovative ideas.

The fourth target group for education in general is the public. People need to realize that our communities need to accommodate the growth expected in our neighborhoods over the coming years. Growth is going to be one of the defining issues for places like the Inland Empire, or some of the suburban rings of our bigger cities and citizens need information about the issues.

With the passage four years ago of a $9 billion state school facility bond, Prop 1A, arguably the relationship between the state's development community and school districts changed materially. Now, as long as there are sufficient public bond funds available, developers are relieved essentially from funding new school construction that serves their developments. But despite this new public financing, don't challenges remain to siting and building new schools in your developmens?

As a company we've always been supportive of schools. In fact, I just gave a speech in which I noted that a key trend in the real estate industry from our perspective is schools as the center of communities. It's something we really believe in and we're trying to do joint-use wherever possible, be it with a gymnasium, library, community center or something else.

One of the challenges is trying to do innovative concepts in a system where the school districts and the school boards have their own sets of challenges that are very real and very difficult. A second challenge is that joint-use makes a lot of sense in many cases, but the devil is in the details. We're working right now in a city where we'll be able to do a joint-use gymnasium shared by the school district and the city. The concept is great. But, working out the details of who has rights to the facility is tricky and requires a lot of thought and planning. If there are instances of vandalism or maintenance, who is responsible?

One of the challenges from a developer's point of view is that the developer can be committed to joint-use, but meanwhile the clock is running on the loan and on the investment in the community. Sometimes you have to say, "I'm going to take the simpler route because the economics won't allow it." That's an unfortunate challenge, but I know it's a real challenge a lot of developers have.

In closing, you now lead a multi-generational family housing company. It would be instructive to contrast the 21st century Lewis Apartment Communities with the 20th century Lewis Homes firm? Could you?

The value system remains the same-giving back to the community, trying to build quality, trying to do customer service in the best way, and taking the long term view. Those are some of the core values that will not change.

The shift from a homebuilder to becoming a master planned community developer forces us to worry about a lot of different things. When my parents were first starting the business, I'm sure things they cared about were more focused on what is the very best kitchen and what is the very best three bedroom house at 1,100 square feet or at 1,900 feet. As the company evolved in the ‘70s and ‘80s, we cared more about street scenes and neighborhoods. Our company today truly is a community builder, addressing issues of education, transportation, and health care. Those are things we just didn't think much about in the past.

We're now a company in transition with a growing property management function-we now have almost a 200 hundred people working in property management for us. That's a big shift in our company. And, it's an important shift because the property management group deals with our customers. We didn't have that function 20 years ago or 30 years ago. The view more towards income property held for long term investment and community building are big shifts for us. We also are fortunate we now have a third generation of the family working for us and they are valuable in bringing new ways of thinking to the company.