Relationship Roulette: The Changing Dynamic Between Institutional Investors and Property Managers
Many third-party property managers are adapting and finding new ways to add value, according to the participants on “The Growing Role of Institutional Investors in Management & Managing Changing Expectations” panel at the recent 2015 NMHC OpTech Conference.
Owners owned, property managers managed and everything seemed to work out well. But the Great Recession and the rapid growth of information technology have transformed the dynamic, wreaking havoc on relationships between institutional investors and the companies that manage their communities.
More than ever before, institutional investors have their fingerprints on nearly every detail of the day-to-day operations of the apartment communities they have an ownership stake in, and they’re not letting up. Rather than fighting the inevitable trend, many third-party property managers are adapting and finding new ways to add value, according to the participants on “The Growing Role of Institutional Investors in Management & Managing Changing Expectations” panel at the recent 2015 NMHC OpTech Conference.
The role of technology
One of those adaptations involves giving institutional investors access to property management software and other third-party manager systems.
“The growth of technology over the past five years has really made this business more transparent,” said David Miskovich, chief operating officer of Bethesda, Md.-based ROSS Companies. “We have a lot of clients who actually log into our property management software, so they know what’s going on at any time.”
The system provides pricing, availability, leads and other real-time features to institutional investors. That level of transparency has made it possible for many institutional investors to make informed decisions about the onsite management of communities they have an ownership stake in, increasing performance accountability and creating some discomfort among management teams.
“We developed a set of metrics that measures the performance of our property managers, and we’ve modified that over the last four or five years,” said David Ohlrich, senior vice president at Federal Capital Partners (FCP), which invests in multifamily properties and hires third-party property managers to operate its assets. “We sit down with our managers on a regular basis, and we go through these metrics. We identify whether their financial performance is strong, whether their marketing team is successful, whether their accounting back office team is performing well and whether the onsite staff is doing a good job. And we rank them.”
The FCP rankings aren’t designed to create competition between management teams of different assets, but rather to facilitate conversations with onsite staff and corporate staff members at the third-party management company. This process helps improve the community’s financial performance, according to Ohlrich.
“We refer to it as a report card, but we don’t use it so much as a report card,” Ohlrich said. “We really use it as a way to interact with our managers and try to get them to be better. We also use it to some degree to see where we may be causing them pain, so we can figure out how we can undo that as well.”
While the increased transparency and involvement of institutional investors can play a significant role in improving performance, it also puts a strain on a property manager’s resources, requiring additional overhead.
Whereas just a decade ago a property manager might have interacted with an institutional as infrequently as once a quarter or even once a year, the amount of contact has increased dramatically, Miskovich said. “We’re dealing with our partners or clients on a daily basis at this point.”
To handle that constant interaction, managers have to hire more associates, according to Miskovich. But they can‘t be just more bodies to handle phones calls. Institutional investors, like FCP, expect them to be high-quality associates who understand technology and how to use it in sophisticated business functions.
“If you don’t have people who are tech-savvy, it is really difficult to keep up,” Ohlrich said. “Even in the markets that we’re in, you have no idea how valuable a high-quality marketing person is. We’re no longer putting ads in the Washington Post or whatever local paper we’ve got. A lot of the folks who were in marketing in the old days would have no idea how to do marketing now. “
Rather than fighting the trend, ROSS Companies is hiring professionals who can work with the sophisticated technology-driven activities institutional investors demand, like revenue management. ROSS Companies recently hired a revenue management professional to work with Rainmaker LRO, which FCP asked the organization to implement on their assets.
With institutional investors becoming more demanding, third-party managers can differentiate themselves by playing a more collaborative role with their partners. One way to do that is to reverse roles and add value to the investor.
“They treat their managers differently if they bring them deals, and that’s the bottom line,” Miskovich said. “I met Dave [Ohlrich] and one of his managing partners a year and a half ago. I cold-called him. The conversation quickly evolved into, ‘We’d love to work with you, but what else can we do together?’”
In the end, managing an institutional investment partner in today’s environment hasn’t changed as much as it appears if you focus on an age-old business truth: “I think it all goes back to relationships,” Miskovich said. “The times have changed and we have to comply with our client’s needs.”
Peter Jakel is an account director for LinnellTaylor Marketing. In this capacity, he provides strategic and tactical public relations guidance and support to apartment owner/operators and vendors to the apartment industry. Prior to joining LinnellTaylor, Jakel was the director of communications for Archstone.