PERSPECTIVE: 10 Strategies for Apartment Profits in 2009 and Beyond
- Oct 30, 2008
By Patrick S. SimonsStrategic Residential AdvisorsBefore we get to the strategies, I’m going to throw out some time-tested adages. 1) Real estate is cyclical, 2) Buy low – sell high, 3) Go against the grain, 4) Make lemonade out of lemons.There’s a lot of wisdom in these sayings that we can apply to the apartment industry right now. The cyclicality of real estate has been well established over more than five decades; the market goes up, goes down and rises up again. Significant profits are made primarily by those who buy assets before they rise in price. Those low buys are usually the result of going against the prevailing psyche of the time, and a belief that there are opportunities in even the most challenging market to make profits out of distressed situations. So, each one of the strategies here relate to one or more of these proven maxims.1. Analyze Markets: As the flurry of activity during the recent boom times has eased up, take the time to focus some of your resources on understanding the economic fundamentals driving your markets. This may be done either through internal staff or external consultants. Either way, your end goal should be a good understanding of which markets will have the best chance to rebound first and with the most vigor.2. Plan: It takes time to generate the right new deals in the right locations from the right sellers. Don’t get caught flatfooted when market gyrations create new opportunities – anticipate them. Take the analysis you complete as discussed in the previous tip, and create a strategic plan identifying targeted geography and other deal parameters, anticipated timelines, likely staffing needs, and capital requirements. 3. Network: The best deals, those diamonds in the rough and needles in the haystack, are rarely found by waiting for a broker to call. Once you have a plan outlining your targets, start getting the word out. Identify and contact anyone and everyone who either now controls, or in the future is likely to control, real property that will fit your plan. 4. Expand: Your analysis may find that some markets you had previously thought about entering, but were perhaps priced out of, are getting more affordable. Or maybe you’ve always wanted to enter some new markets but were constrained by the challenges we all had during the boom times of finding competent and qualified personnel.5. Hire: The conventional wisdom right now is to cut overhead and run for cover. Certainly, it makes sense to trim the fat in an organization when work slows, but now is the time when you can really pick and choose talent. And that talent may be open to any number of arrangements including consulting work, temporary assignments, or a slow ramp up to fulltime employment.6. Cash: The fact is that, while there are many contributors to the commercial real estate slowdown, the primary driver has been a profound lack of capital. Therefore, it stands to reason that the best acquisition deals will soon be had by buyers who have cash to purchase from sellers who need cash. So, to take advantage of the best deals of the future, raise cash. 7. Operations: Expenses are not to be overlooked during a downturn. All of your expenditures should be thoroughly reviewed, both at the corporate level and those at your operating properties. It may make sense to bring in a third party to comb through your operating expenses, and identify opportunities for savings. In addition to the extra cash flow, remember that every dollar per-month you cut in property operating expenses translates into $200 of property value at a 6 percent cap or nearly $350 of additional amortizing debt at 6.25 percent.8. Negotiate: At the risk of offending my fellow service providers, during the boom times, contractors, vendors, and consultants got used to property owners and developers taking just about any proposal without questioning the pricing, the delivery schedule, or the skill level of personnel committed to the assignment. Times, of course, have changed. So, brush off your negotiating skills. 9. Time Deliveries: Much like planning your hiring based on the anticipated timing of market recovery, construction start dates should be timed as well. If your market analysis forecasts that your market will recover in 12 to 18 months, and if the construction schedule for a new project is anticipated to be 12 months, the ideal start date is about six months from now. And, if you still have architectural work to get permit-ready, it may be best to get that going (or keep it going) right away so you’ll be able to start construction in six months. That way, your project will hit the market when demand is rising, vacancies are contracting, and rents are growing.10. Build: If your analysis and strategic plan determine that starting construction within the next 12 months makes sense based on the forecasted recovery in your market(s), then you should start talking with contractors now. Much like service providers, it’s a new day with contractors. And, remember, it takes a considerable amount of time to get from initial talks to inking a contract.Patrick S. Simons is founder and principal of Strategic Residential Advisors, which provides consulting services to developers, owners and investors in multifamily properties nationwide including market research, business planning, development, asset management, and transactional due diligence. Simons has been a speaker and panelist at multifamily and building conventions and conferences, and an instructor in development and construction issues at UC Irvine. He is a full member of the Urban Land Institute (ULI), and sits on its national Silver Multi-Family Council. You can email him at email@example.com.