Why Asset Management Is Paramount Today
Karlin Conklin of IMG Capital on why it's more important than ever for property owners to look inward.
Five years ago, I shared the multifamily industry’s top trends as we entered a new upswing year in the investment cycle. I warned that cap rates had stabilized at a low plateau and, contrary to herd behavior, stressed the importance of selecting a solid debt vehicle to mitigate investment risks. At that time, IMG was growing its asset management department to prepare our portfolio for inevitable changes in market dynamics that were to come.
The 2019 ULI Emerging Trends in Real Estate report issued a related warning: “Asset management is poised to occupy an even greater than usual place in the minds of real estate investors and property operators in the years ahead. It is not that asset management is ever unimportant. But, in a period when transaction velocity is easing and when owners worry about reinvestment risk in the event of a sale, the ability to extract additional value from their existing portfolio is an important way to tick yields in the right direction.”
Of course, no one could have predicted exactly where we are today. Increasing cap rates, historical inflation and aggressive moves by the Fed are already impacting multifamily property values. As Phyllis Klein, senior vice president, head of agency production at Capital One, emphasized recently at IMG’s national investor forum: “The system is shocked by the major run-up in rates, and the market needs to settle.”
As these external pressures settle, multifamily sponsors must focus inward. The primary way to hold or increase property value over the next year will be through dissecting your portfolio’s operations and NOI. To do this, sponsors will be increasingly dependent on the the asset manager.
CRITICAL LAYER BETWEEN STAKEHOLDERS
Asset management is the critical layer between owners (investors) and property management staff. An asset manager:
- Brings in-depth knowledge of market fundamentals and intel on a property’s competitive set to guide acquisition decisions
- Creates the business plan for an investment property
- Optimizes revenues, reducing expenses whenever possible
- Oversees capital improvement projects
- Delivers ongoing, transparent reporting to the ownership group
Apartments are unique in offering short-term leases. This allows for quick and strategic decision making. It’s a kind of safety net that you just don’t get in other types of commercial real estate like retail or office. This safety net, however, only applies if asset performance is continuously being monitored and maximized using accurate, live data.
Mistakes can be costly, especially with today’s upwardly mobile renter demographic. As an example, a strong site team might only need a total of five business days to turn a vacant apartment unit around. As soon as the tenant gives notice, protocols such as walking the unit and scheduling contractors should run efficiently. If the tenant moving out turns their keys in on Monday morning, you could reasonably expect to have a new resident moving in Friday afternoon. And if the apartment is receiving upgrades, a strong renovation program should be in place to minimize the number of days a unit is offline.
If the on-site management’s system is weak, units sit vacant. Income is lost. Advertising costs increase. Too many vacant units at the property could lead to offering concessions, further reducing income. Asset managers are quick to identify holes in the system and ensure that on-site property managers have the support and systems they need to do exceptional work, which can lead to dramatic income gains.
Let’s be clear: This role is not for the faint of heart. All jobs have their difficult days, but one could argue that asset managers never have easy ones. From due diligence to disposition, this role maintains oversight of the investment property through the entire ownership period, which could be five years or more. But for all the fast-paced problem solvers, data nerds, creative innovators, self-starters and quick-witted overachievers who do decide to take this role on, the potential to make a positive impact on residents and communities might just be their biggest reward.
Take the 80s-built, 270-unit property our firm purchased in Atlanta back in 2019 for example. The asset was underperforming because it wasn’t being managed properly, which had contributed to a declining tenant base. Former ownership groups had deferred maintenance projects. Security features including broken lights around the parking lots had been overlooked. A small pond at the center of the community had been grossly neglected. Despite boasting the largest floor plans in the competitive set, many of the interior units had not received modern upgrades. As the new owners, we envisioned the property’s fantastic potential.
Our asset management team quickly went to work creating a repositioning plan. The apartment community was rebranded and has received over $2 million in improvements to date.
Today residents enjoy newly built picnic areas, a hammock park, sport court, a playground with a splash park, decorated grilling pavilions, a refreshed pond with walking trails, and a renovated clubhouse/leasing center with a package center and new gym facility. The resident amenity set mirrors the unit renovations we’ve completed including resort-style kitchen and bath finishes. The transformation is like nothing else seen in the submarket’s competitive set.
Thanks to the strength of our asset management team, our value-add investment is proving to be successful. Not only has the property’s value increased over $12 million dollars in less than three years, but the residents have a community—not just a building—that they are proud to call home.
TIGHT FIGHT FOR TALENT
If there’s one thing we know for sure, it’s that strong operators are a safety net during economic downturns. Exceptional asset managers can be hard to come by, but they will be a survival mechanism for multifamily portfolios over the next 12 months. Look for these roles to be in growing demand as sponsors seek to extract value—and peace of mind—from their existing multifamily investment properties.
Karlin Conklin is principal, co-president & COO, Investors Management Group.