In a competitive, fast-changing environment, meeting client expectations calls for unprecedented sophistication about business strategy, finance and other areas. Experts name five key areas to focus on.
by Robyn Friedman
The days are long past when managing a multifamily community was primarily a matter of collecting rent, paying bills and maintaining the physical asset. Adding value is now a standard part of the job, because of the much-discussed evolution of the profession into a strategic role. In broad terms, the mission is to think like an owner, rather than a caretaker. But the question remains: What do owners and asset managers really want?
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Answering the question is a high-stakes affair. “You’re taking somebody and giving them the responsibility of managing potentially a $50 million asset,” said Christopher Finlay, chairman & CEO of Lloyd Jones Capital, a diversified investor and operator. “If you don’t have the right manager, you absolutely will not achieve the business plan. And that could have drastic financial results.”
Strategies for meeting the needs of ownership stem from a handful of trends that are reshaping the property manager’s role.
Fee compression. Management fees vary widely depending on the size of the property, the size of the owner, the market and the size of the cashflow stream, so it’s hard to pin down ranges for property management fees.
But things are getting tighter. Twenty years ago, the fee for managing a typical 200-unit community was close to 5 percent of the total revenue generated at the property, recalled Walt Lamperski, president of Atlanta-based Stonemark Management. A decade ago, the fee was 4 percent; today, it’s 3 percent. “It’s the new competition,” he said. “Everybody is involved in third-party management.”
Labor squeeze. Good multifamily managers are hard to find, a fact exemplified by rising compensation. Ten years ago, the annual salary for managing a 400-unit asset in Atlanta was $40,000; today, Lamperski pays between $65,000 and $75,000 for someone to manage a comparable community. So competitive is the market for skilled managers that National Multifamily Housing Council members give their business cards to potential managers when they receive good service in other settings, reported Rick Haughey, NMHC’s vice president for industry technology initiatives.
Savvy clients. Institutionalization of ownership spearheaded by REITs and other investors have raised the bar for information gathering and financial reporting, noted Haughey.
Technology. Robust development has raised competition, held down yields and forced owners to sharpen their pencils. As some traditional property management functions are automated, a growing number of properties are eliminating the on-site manager’s position. “A lot of that has to do with competition in the marketplace,” said Dustin Read, an associate professor of property management at Virginia Tech. “The market has been so frothy for multifamily that yields have been driven down.”
So how do property managers meet the rising expectations of the asset managers they serve? For service providers seeking to answer that question, step one is to recognize the headaches shared by both groups. “A lot of property managers think that asset managers sit on high and don’t feel the same pressure to do more with less and wring every dollar out of a property,” Read said. “The more property managers and asset managers understand what each other does, the more opportunities for collaboration.” Here are five essential qualities that asset managers expect today.
Create value. Managers should look beyond the physical confines of an asset in order to understand its place in the larger market. Yet Read’s research suggests that most asset managers think their on-site counterparts don’t fully understand the owner’s objectives. “They’ll say that their property managers are worried about the blocking and tackling on the ground and don’t have any idea what our investors’ long-term goals are,” he noted. A good start: reading the owner’s prospectus, which will help the property manager recommend steps that will help meet or exceed the client’s goals.
At Stonemark Management, Lamperski adds value for his clients by training his team in effective negotiation with vendors. “We’ve been able to create lots of savings without sacrificing the work,” he said. Stonemark renegotiated contracts or switched contractors at Barrington Hills, 376-unit Class B community in Peachtree Crossings, Ga., an Atlanta suburb. The effort saved $20,000 per month on maintenance-related expenses and advertising without cutting services.
To add value most effectively, property managers should be ready to think boldly and willing to take the initiative. So says Bryan Furze, senior vice president of asset management at Federal Realty Investment Trust. Speaking at the Institute of Real Estate Management’s Global Summit in September 2018, he elaborated: “I need someone who’s going to demand a seat at the table.” And he issued a warning to asset managers that don’t provide that seat: “You’re setting yourself up for failure.”
As Furze reminded his IREM listeners, reducing expenses is much easier than driving revenue. Such was the successful approach at one Federal Realty property. After an ineffective, overpriced security contractor was dismissed, management set several cost-effective alternatives in motion. The staff asked local law enforcement to step up its presence and enlisted the property’s other service providers to watch for suspicious activities. All told, the change saved tens of thousands of dollars annually, Furze reported.
Speak the language of finance. Managers should always bear in mind that each decision they make has an impact on the asset, which is, after all, an investment vehicle that creates cash flow. For that reason, talking about cap rates, NOI, absorption, fair market rent and vacancy costs should be second nature. “Even if you are talking to ownership in really simple return metrics—things as simple as payback period or cash-on-cash return—it signals to asset managers that you understand this piece of real estate as an investment vehicle,” Read said.
Triage effectively. At almost any community, the staff could come up with a substantial wish list of upgrades and programs for residents. But before recommending any new items, managers must think about the economic payback. Apart from safety issues and legal mandates, every proposed expenditure should ultimately be tied to cash flow.
During the summer of 2017, the multifamily market in Columbia, S.C., took a major blow. The expansion of the V.C. Summer Nuclear Generating Station, a $9 billion project northeast of the state capital, was halted after years of delays and construction problems. The move cost some 5,000 local jobs. Occupancy at some communities slid as low as 30 percent. Waters Edge, a community owned by Lloyd Jones Capital, was among those affected.
Yet management’s efforts kept the impact in check and prevented occupancy from dipping below 85 percent. The key was investing in activities that promoted resident morale and involvement at the community. Highlights included a monthly breakfast bar; on-site and off-site activities, such as pizza night and an Easter egg hunt; and purchasing items like tennis equipment and air compressors which management made available for residents to borrow. The upshot of the strategy was a happy environment that encouraged residents to stay—and their friends to move in.
Serve as a resource. Property managers should aspire to to serve as the go-to information resource for ownership. Rather than merely reporting what’s happening at a community, it’s far more valuable for a manager to provide insight into the local market. Nor are facts and figures regurgitated from market reports what asset managers are looking for. Instead, they need what Read calls the water-cooler chatter—for example, “how are consumer preferences changing, how are tenant demands changing, what’s influencing whether tenants are staying or going.”
Read predicted that technology will streamline reporting and other management functions in the future, allowing managers to operate more efficiently. “That will free up time for property managers to engage in different things,” he said. “Technology will fundamentally change property-management expectations.”
Be creative and communicate clearly. Property managers must speak up whenever they have an idea about improving a property’s performance, even when the topic doesn’t fall within their stated job description. And when they do speak up, managers should take care to convey information effectively and deploy it in the field.
“Show up, be very confident, know your stuff and be part of the team,” Federal Realty’s Furze urged his audience at the 2018 IREM Global Summit. “If you’re not welcome at the table, it says more about the asset manager than it does about you.”
Defusing tensions between client and service provider is also vital to communication. Friction tends to arise most often “when there is some disconnect on the quality of trust,” said Kim Collins, associate director for asset services in CBRE’s Indianapolis office, during the IREM Global Summit. In one case, Collins’ team remedied a frustrating breakdown in communications by creating a master spreadsheet that provided an all-in-one tracker for functions at the property.
Read the March 2019 issue of MHN.