Property Management Projections for 2011
Armed with lessons learned from the downturn, the industry moves forward in 2011.
Throughout the recession, many have pointed to property management as the crucial asset required in all owners’ toolboxes. It was all about going back to the basics to try to, at the very least, “break even” and maintain NOI.
“One of the big lessons is, don’t fall in love with your own projections,” asserts Jesse Holland, executive CPM, president and founder of Latham N.Y.-based Sunrise Management & Consulting AMO and regional vice president of IREM (Institute of Real Estate Management). “Be realistic to what’s actually happening, not what you want to be happening,” he advises.
The industry expects negative net completions of new housing units for 2011, as well as employment gains of 2.5 million. But while many have noted that job growth is the key to recovery, Jamie Teabo, executive vice president at Post Apartment Management, believes the rebound is not entirely dependent upon the employment figures. While “the economy has not realized the job growth that many had hoped for by now, the business is in recovery,” she reports.
Others see signs of a thaw, as well. “The markets have definitely tightened up. … Some people are starting to buy properties … and there’s a little bit of positive momentum and a little bit of optimism in the air,” notes Dan Haefner, executive director-multifamily management, Drucker & Falk, which manages nearly 25,000 units in the Mid-Atlantic and Southeastern United States. He reports that the Southeastern region is projecting between 4 percent and 5 percent revenue growth in 2011. “And if you have 3 percent expense growth, that means your NOI is growing fairly well,” he adds.
With any signs of improvements there often comes a tendency to forget the pains of the not-so-distant past. But so much was learned in this cycle that needs to be remembered in order to forge ahead in the year to come.
People are your best investment
“Next year there’s going to be heavy focus on training, service, neighbor loyalty,” says Pedro Zapata, vice president of operations at San Mateo, Calif.-based Prometheus Real Estate Group Inc. “We want rents and occupancies [to increase] but we are really in the business of service. … We are in the business of making sure that our properties are intact and well-presented, that our employees are well-trained. If we do a good job, it’s obvious we’ll have better rents and occupancies.”
Many industry experts agree that one of the biggest differentiators among apartment communities is their on-site staff. They are, after all, whom residents interact with on a daily basis and are truly the face of any management team.
Prometheus is focused heavily on customer service, not only internally, but externally as well, says Zapata. “We’ve taken a more holistic approach to what we could have done in terms of servicing our neighbors. Our initiatives have been how to maintain those relationships and build loyalty and commitment to our neighborhoods,” he says. As a result, the company has expanded its neighbor satisfaction survey from yearly to quarterly.
“Investing in the people and training programs and designations and keeping people motivated is what we found to be the best investment,” Holland notes. “Working with our frontline staff so that they’re comfortable in their position and they feel secure allows them to go out and work with our residents to help them feel more secure and help them through tough times.”
Another related concern for property management companies is whether their on-site associates know how to work in a strong economy, points out Christina Sullivan, senior vice president, Gables Residential. “A lot of them have never worked in anything but a down cycle. The turnover rate onsite is relatively high, and a lot of [the associates] are Gen Y, so they’ve only worked for us during a time of concessions,” she notes.
Because of this, it is crucial to retrain your staff, particularly to teach them how to close a sale without concessions and how to sell a rental rate increase.
“All property managers are not the same. Those who approach their profession as continuously changing and get involved in places like IREM and get their certified property management designations and take part in what’s happening in the industry are doing much better than those who are just, ‘It’s a bad time so the best I can do is break even,’” says Holland. “The world is a constantly changing place.”
Controlling expenses, increasing NOI
Expense control is particularly critical during any weak economy, says Sullivan, adding that some non-essential maintenance may have been deferred during the toughest times. That’s not to say all maintenance was cut, she adds, because it’s futile to aggravate customers in an effort to save a dime. But it may have been crucial to determine which items were necessary and which could be put off temporarily. While some of this will have to return, revenue numbers are projected to be significant enough that NOI is expected to be positive in the next one to two years.
Another area of expense control where attention has been focused is lead management. “There’s two components to it: getting the people—what’s your best source to get people, what’s your lowest cost to get those people and then, once you get them, what is it you’re doing with them? If your response is not almost instantaneous these days … you may have lost a potential lease or lead,” Haefner points out. “Assuming that someone did respond to them and you start a dialogue, how are your people trained to make sure you convert as much of that traffic as you possibly can?”
Many companies are also now looking for new ways to increase their revenues, whether by ancillary income or through a return of certain fees.
Holland notes that if residents see a value to a particular item, they’ll likely be willing to pay for it. For example, apartment communities often have an opportunity to purchase bulk cable and Internet for less than the retail rate and charge a differential, which is still less then the original rate, creating a win-win situation for the community and for the residne.
One strategy that Chicago-based Waterton Residential uses is “evaluating partnerships with firms that provide services to residents,” says Barney Pullam, CPM, vice president-business process. “We are looking to see how we can work with firms to provide a service the resident is looking for, and capitalize on that by receiving referral fees or a percentage of the revenue.” In its mid- and high-rise communities, for example, Waterton may partner with a rooftop management company that can network with cell providers. It also works with appliance leasing service providers in localities where residents have the option of renting their appliances.
While companies waived some fees during the downturn, many are returning to them now. Gables, for example, is no longer waiving application fees, a closing tool it implemented during the difficult economy. (Sullivan adds, however, that leasing staff may need to be retrained and suggests devising an incentive program to encourage the onsite team to participate in the upturn.) Pet fees are also an option.
Pullam points out that these fees should be consistent and that they should be increased over time. “Everything goes up in value and you should consider that and make those minor adjustments,” he notes. “Be considerate of market conditions and what the competition is doing, but try to increase those fees slightly.”
Incentivizing renters to renew early is another way to increase your revenue. Prometheus, for example, has an early renewal program whereby renters who renew their leases 31 to 60 days in advance may receive a larger concession than those who make their decisions later.
Drucker & Falk, meanwhile, has implemented a policy across approximately 30 percent to 40 percent of its portfolio, whereby residents are mandated to purchase renters’ insurance. Haefner reports that it has been met with little to no resistance, at the same time that it has saved the company hundreds of thousands of dollars in insurance expenses and deductibles.
“It’s fairly inexpensive insurance, and the reason there’s been little to no resistance is because we tell the people that for $6 to $10 per month (depending on what state you’re in), you can protect your own possessions. … It’s not so much selling them on the fact that they’re going to be the ones that caused the loss but it’s going to be someone else that causes the loss that has the impact on them.”
What have we learned?
Many companies were forced to resort to concessions during the worst of the downturn in order to maintain occupancies. Holland recalls that one of his competitors provided concessions in what he calls “a very short-term way.”
For approximately two weeks, this competing company provided concessions for its stack of vacant three-bedroom apartments, for example, resulting in Holland’s company losing traffic during that time. But once the short period was up and all the competition’s units were rented, Holland was able to rent his units without as large a concession, when he used one at all.
“We were monitoring [the situation] very carefully and knew what they had in their inventory. … We figured they’d burn themselves out, which they did, but we were watching to make sure that they did and that we didn’t need to change our strategy,” Holland recalls.
Those companies that utilize a revenue management system, however, not only did not use concessions during the recession but also were able “to manage rates more effectively through this downturn than through the previous downturn” since rental rates are adjusted on a daily basis, asserts Teabo.
“It’s changed our industry in pricing so much that customers are really used to a monthly dollar amount and not concessions,” Sullivan points out. “The word ‘concession’ is not as prevalent as it used to be … We’d love to give concessions upfront but people are interested in the monthly commitment. ”
Haefner agrees. “The need for concessions is more of a choice of an owner than it truly is a necessity from the renter’s perspective. … Concessions can be used as an effective marketing tool, possibly, to get people into the office, but at the end of the day, it’s really about what’s the net total [the resident is] going to pay.”
Pullam, whose company embraced revenue management about 18 months ago, found that it provided Waterton with a certain “pricing discipline” it wouldn’t have had otherwise. He adds, “Residents embrace lower effective rents, whether it’s Class A or Class C. Everyone has his own personal budget. … Are they expecting concessions? No, but they are looking for the best deal they can find.”
For those companies that have not yet jumped on the revenue management bandwagon, be careful not to drop rents in too large of an increment, advises Sullivan. Because rent is paid on a monthly basis, the industry has a tendency to offer concessions in monthly, rather than weekly, increments.
“The challenge is that it’s hard to get away from them when the lease expires; it’s difficult to all of a sudden increase [rent] 8 percent,” points out Pullam.
And while using a revenue management system appears to be the preference for much of the industry, Sullivan cautions that it still needs to be managed based on a number of factors, not just price.
“It’s catching the little blips before [they become] big blips. We need to remain vigilant in tracking our metrics and keeping our ears to the ground and in tune with what’s going on,” says Holland. “Property management’s a full-contact sport. You have to go out there every day and suit up.”