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?
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. A decade ago, the fee was 4 percent; today, it’s 3 percent. It’s the new competition. 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, they cost anywhere from $65,000 and $75,000 for someone to manage a comparable community.
Savvy clients. Institutionalization of ownership spearheaded by REITs and other investors have raised the bar for information gathering and financial reporting.
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. The market has been so frothy for multifamily that yields have been driven down. (At least Pre-Corona, anyhow.)
MEETING EXPECTATIONS
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. The more property managers and asset managers understand what each other does, the more opportunities there are 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. 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.
To add value most effectively, property managers should be ready to think boldly and willing to take the initiative. I need someone who’s going to demand a seat at the table. If you don’t provide that seat for your property manager, you’re setting yourself up for failure.
Reducing expenses is much easier than driving revenue. If we can conserve water, get more cost effective lighting, implement charge-backs for utilities to the tenants, find the most cost effective lawn care professionals, implement a cost segregation study, etc. then we can drastically increase NOI by decreasing these few expenses.
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.
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.
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 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.”
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. 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. 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. In one case, our team remedied a frustrating breakdown in communications by creating a master spreadsheet that provided an all-in-one tracker for functions at the property.