Some leaders treat market downturns as a time for business as usual, hoping their day-to-day consistency will produce the same results as years past. They think their tactics will give their employees a sense of normalcy during rocky times.

Brian O'Neill, founder and chairman of King of Prussia, Pa.-based O'Neill Properties Group, a multifamily builder and owner with 1,758 units built and in the pipeline, takes a different approach. He's moved his office to the main floor of his building so that his people know he's there with them through these difficult times.

"I have to be a leader every day," O'Neill says. "I psych myself up before I walk in the office, and I have a conscious list of what I want to accomplish. I want to continue to inspire the people beneath me—to lead their ship and be omnipresent in the organization."

But O'Neill is not hunkering down. Instead, he wants his team to get more aggressive and is pushing his employees to sell harder and find more acquisition opportunities. As soon as he reins in the company's expenses, he plans to pursue new employees, assets, and businesses.

O'Neill is not alone. For those firms that are in good financial shape, the next couple of years offer opportunities to expand—so long as they didn't overreach during the boom. But before they can expand, they have to retrench. "You have to have a more compelling proposition to get financed today," O'Neill says. "Rents are fixed. Therefore, you have to make it up on costs."


So far, multifamily executives have had little reason to dissect expenses. As the for-sale condo and single-family market deteriorated, people were either forced back to apartments—or they never left. But as the past few months have proven, things can change in a matter of days, despite solid fundamentals right now.

Nationally, vacancy levels are at 94.5 percent, according to M/PF Yield- Star, a Carrollton, Texas-based multifamily research firm. The apartment sector has outperformed the U.S. REIT Index, with a total return of 23.3 percent year-to-date, versus a 2.9 percent return on the Index. "Apartments have been identified universally in the core valueadd and development arena as the one place where you can continue to make a reasonable return," O'Neill says.

That kind of long-term faith in the industry won't prevent some rough sailing in the immediate future, however. "I'm not sure we in the industry have felt the full force of what has taken place out there," says David Neithercut, president and CEO of Equity Residential, a Chicago- based REIT with 550 properties in 23 states and the District of Columbia. "I'm not suggesting 2009 will be a picnic, but I feel good about our business."

Even the most ardent supporters of rental housing will admit that times will get tougher. The Wall Street meltdown will likely exacerbate a deteriorating job situation. Sooner or later, apartments will feel the pain in occupancies. "We'll lose some renters because we're losing jobs," says Ron Witten, founder of Dallas-based Witten Advisors, a market advisory firm specializing in the major apartment markets across the United States. "When paychecks go away, so does the ability to pay rent."

If multifamily executives want to see what bad markets look like now, they could think back to the "tech wreck" of the early 2000s. In most markets, things aren't nearly that bad. Next year, Witten expects the industry to lose 0.5 percentage point to 1 percentage point in occupancy. "On a net basis, we will lose some renters and have slightly negative absorption," Witten says. "It will be nothing as severe as 2001."

Things are already bad in overbuilt markets such as South Florida, Las Vegas, Phoenix, Ariz., and Orange County, Calif. "If you look at the country as a whole, there"s flat to nominal growth—I call it lackluster," says David Schwartz, principal for Waterton Associates, a Chicago-based owner and manager with roughly 16,000 apartments in 15 major markets and 13 states. "It's a result of excess housing inventory in conjunction with softening demand from the slowing economy."


Most apartment owners aren't waiting for their markets to soften before they make changes. Many already are looking for places to cut. In fact, most companies like to think they're pretty lean— even in good times.

"We always look at what we can do to keep expenses under control," says Cindy Clare, president of Kettler Management, an apartment builder, owner, and manager with 12,000 units in the greater Washington, D.C., area.

But rising unemployment and the meltdown in the financial markets have led to greater financial diligence among property owners and managers. "We're looking at every dollar that"s going out the door," says Julie Smith, president of Bozzuto Management Co., a Greenbelt, Md.-based firm with 23,455 units. "If it's not going to facilitate leasing or a gain in revenue, we don"t want to spend. We're really being very careful."

The thing about cutting expenses, however, is that there isn't just one place to look. Adam David Lynd, COO of The Lynd Co., a San Antonio-based apartment owner and manager with 30,583 units, adopted a technology system that limits and tracks employee expenses. If they reach budget, they can no longer spend. "It limits your purchasing ability," he says. "It won't let the manager spend over budget. I rolled this out to my whole portfolio, and it has been a big benefit."

As the market changes, many apartment operators and owners are targeting their subcontractors. Right now, many of these service providers, such as landscaping and delivery companies, use fuel surcharges as a way to hike prices. But Mark Fogelman, president of Fogelman Management Group, a Memphis, Tenn.-based management firm with 19,000 units, is taking a stand against cost increases from subcontractors.

"It seems that everybody expects that they can pass on their risk and cost increases to the end user, which is us," Fogelman says. "we're going to our suppliers looking for a 3 percent to 5 percent cost reduction. We should have more negotiating power than ever due to the fact that our vendors have fewer customers right now."

Landscapers and contractors aren't the only ones feeling the pinch from the single-family housing meltdown. Local governments and municipalities have seen drastic declines in their tax base as well. Although assessments may be going down, tax rates are rising. That"s where Kettler is looking to attack. They are challenging tax assessments on certain properties.

"we're looking at ways to reduce real estate taxes," Clare says. "we're seeing increases in real estate taxes. Those are areas where we are trying to make sure that if we can appeal, we will appeal."


Like many apartment owners, Schwartz of Waterton is searching for cost savings in his daily operations. But he's also attempting to secure the company's future with its lenders.

In fact, Schwartz thinks Freddie Mac and Fannie Mae may not be around in a year and feels certain that, should the entities go away, other sources of debt may not immediately appear to take their place. As a result, he is taking care of interest payments that could balloon in the near future.

"we're acting defensively, which means we're first looking at our balance sheet and at debt maturities," he says. "Anything coming up in the next two or three years, we're looking at very aggressively as far as putting long-term debt on it so we don"t have any interest rate refi- nancing risks in the future."

Once that"s taken care of, Schwartz plans to get aggressive. Since many apartment owners may not be able to refi nance, properties could soon be on the market at significant discounts to where they traded a couple of years ago.

Others see this as well. "Most people who have debt maturing currently ... will have a real challenge dealing with that debt maturity," Equity"s Neithercut says. "It would not surprise me at all if we saw some opportunities to look for assets as we got closer to the end of the year."

O'Neill plans to try and scoop up those bargain assets. If he can't, he's happy to take them on as management opportunities. "we're turning over rocks at Lehman Bros. to figure out how we can best utilize our platform in construction, capital markets, management, rent collection, and sales and leasing," he says.

Schwartz is utilizing a similar strategy, hoping his management company could eventually translate into acquisition opportunities. "We continue to do more fee management, which is good for us," he says. "It allows us to participate in distressed situations because we're doing fee management on behalf of banks who are obtaining properties through foreclosure. Sometimes, we end up being the buyer [as well]."

Expanding management contracts also gives operators the opportunity to do something else uncommon in a recession?expand their staffs. "We have an aggressive hiring strategy to find the best people in the market who normally wouldn't move but are looking around," O'Neill says. "we're not just looking at the superstars at the top. we're looking at the superstars at every step of the way from the top to the bottom."

By getting those superstars and grabbing management contracts?possibly even assets—at a discount, O'Neill is proving that it"s possible to use a recession to your advantage, provided you have the cash available to do so.

"we're using the distress in the market to enhance our profitability?as opposed to crying about it and watching it depress our profitability," he says.

Say What?

A quick primer to deciphering multifamily lingo.

Hunker Down Manage expenses and focus
Play Defense Manage debt before it matures
Block and Tackle Focus on leasing apartments and managing expenses
Having Dry Powder Have cash available to make deals
Value-Added Play Take a rundown property and bring it back to life
Win/Win A deal that works out for both parties, be they partners or buyer and seller
Juicing Your Returns An action that increases payback on an investment