New Frontiers

When Mark-Taylor Residential announced this past summer that it was moving into the Portland, Ore., market, it may have seemed like an abrupt decision. But the exact opposite is true. The Phoenix-based operator of resort-style apartments had spent two years taking a long, careful look at the Pacific Northwest before deciding to enter the Emerald City.

“We needed to get into another market,” says Kathleen Danuser, an asset manager for Mark-Taylor, which manages 11,622 units in Phoenix. “It was always on the horizon as something that we wanted to do.” With its only base of operations in Phoenix since the early ’90s, it made sense for the firm to expand its reach. After all, Phoenix is one of the poster children for the country’s housing meltdown over the past three years, where a glut of shadow supply could push vacancies to 12.3 percent in the market, according to Encino, Calif.-based research firm Marcus & Millichap Real Estate Investment Services.

As is the case at many third-party managers, a client (who the company would not identify) first suggested to Mark-Taylor that the firm should move into Portland. Despite a long-term relationship managing 852 of the client’s units and the potential for another 2,500 units down the road, the firm had to carefully evaluate its options.

Mark-Taylor won’t be the only management company making such tough decisions throughout the next couple of years. Many lenders and special servicers are expected to take over distressed properties across the country, and they’ll be looking for managers with whom they have established relationships to follow them wherever the money trail leads. Additionally, with occupancies floundering and rents plummeting in many markets, owners will be looking to hire their top-performing managers to work at their more troubled assets. Although these situations create opportunities for fee managers, entering new markets is fraught with peril. Before you decide to open up shop in unchartered territories, follow these five rules.

1. Evaluate your relationship with the client.

Often, when pure management firms decide to go into a new market, there’s one major motivator—fear. When an owner asks a firm to manage additional properties, usually the answer is yes, especially if it’s for a large client. “What dictates whether we follow a client is how big the client is,” says Jon Segner, president of Minneapolis-based Dominium Development and Acquisition, an owner and manager with 18,000 units. “We want to keep the business and make them happy.”

When a special servicer asked Dave Woodward, CEO of Laramar Communities, a Greenwood Village, Colo.-based owner and manager with around 30,000 units, to jump into a new market, their relationship played a key role in Woodward’s decision to say yes. The geography just made it easier. “We wanted to continue that relationship and grow with them,” he says. “You don’t want that bank or special servicer to call someone else.”

If you don’t say yes, that means the client will start talking to other managers. “You don’t want to give them the chance to say, ‘Let’s find someone local,’” says Mark Fogelman, president and chief operating officer of Fogelman Management Group, a Memphis-based manager with 18,000 units. “There’s always someone approaching our clients who would love to have the chance to manage their properties.”

So when faced with the threat of losing business, property managers tend to look for a way to make the opportunity work. After all, there’s little to lose, Woodward says. “The incremental cost to go into a new market is not that much,” he says. “It’s not like starting a manufacturing business. If you don’t have enough people, the cost is associated with flying people in and out.”

Fogelman, though, isn’t sure it’s that easy. He warns that there’s a lot to lose. “Your reputation is everything,” he says. “All it takes is one public termination of a management contract, and the word is out that you’re not a quality company. You have to approach every fee management assignment carefully and make sure you succeed in it.”

2. Do your due diligence.

Most people don’t take two years to do their due diligence before they move into a market, as was the case with Mark-Taylor, but many apartment owners and operators start at the same place—with plenty of questions. “We ask questions of everyone and anyone we can get our hands on,” Danuser says.

You can often start this search in house. “We happened to have some people we relocated from this area who work for us who were very familiar with things and knew the ins and outs,” she says.

EXPANDED REACH: Fogelman Management Group took over the operation of Talon Hill Apartment Homes when the Memphis-based firm moved into the Colorado Springs, Col., market earlier this year.

Credit: Pattie Woods

Dominium also goes through every shard of information it can find while pounding the shoe leather. “Before moving into a new area we put substantial effort into understanding the demographics, population trends both in the past and going forward, and the rental real estate market in the area surrounding the property,” says Chris Barnes, a project partner at Dominium. “This is accomplished not only through third-party reports, such as market studies, appraisals, and demographic reports, but also by personally visiting the property, driving the area, and visiting comparable properties within that market.”

However, there’s more to exploring a new market than just knowing the rents, concessions, and market nuances. You need to also be aware of key laws in those markets. For instance, Danuser says in Oregon anyone renting an apartment must have an established office, even if it’s a back office at a property. “You have to understand all of the municipality laws and the state laws and everything to do with employment and opening a business,” Danuser says.

Therefore, it’s critical to seek professional advice about each market’s legal nuances. “We align with consulting expertise to help us get up to speed with taxation and employment, and all of those things are very different everywhere you go,” says Rick Graf, president of Seattle-based Pinnacle, the country’s largest property manager, according to the 2009 MFE Top 50 Managers list, with 185,219 units nationally.

3. Look for geographic efficiencies and build regional strength.

You schooled yourself on all the ins and outs of the new markets but don’t forget to ask yourself if you have the manpower to handle the gig. Fogelman and Woodward know the drill. They recently faced similar dilemmas when longtime clients asked them to move into peripheral markets—Corpus Christi, Texas, and Spartanburg and Greenville, S.C., respectively. After careful consideration, both executives took advantage of the opportunity to expand their portfolios.

One of the major reasons they decided to make the leap: Both companies manage properties within a reasonable distance of these markets and already have regional managers in place who can oversee the additional properties. Woodward has four properties across the state line in North Carolina, while Fogelman has 615 units roughly 130 miles away in San Antonio.

Often, though, it is necessary to set up a regional office—especially if you don’t have an established footprint nearby and you have enough mass to justify a new office. The reasons are many. A new operational headquarters allows greater efficiency for invoices, puts less strain on corporate, and helps you establish credibility. “In the case that we only have one or two properties in an area, it is usually not worth establishing a regional office until we get more properties in that market,” Barnes says.

One reason that Mark-Taylor decided to expand its geographic scope and enter Portland over Dallas or Albuquerque, N.M., for instance, was because it saw the opportunity to use its Portland office as a base for operations throughout the Pacific Northwest—an area with a ton of potential for new clients. Already, the firm has moved across the Columbia River from Portland to Vancouver, Wash., and is setting its sites even further out. “Portland has 2.2 million people, and it’s only a three-hour drive to Seattle,” Danuser says. “There are other markets here that are pretty much in our backyard.”

But it’s crucial to know your geographic limits. Fogelman has branched out to San Antonio and Colorado Springs, Colo., but doesn’t expect to move any further West. “California is the one place we will not go. That’s a stretch—to move from Memphis across the entire country,” he says. “I’d say 1,000 miles is probably our limit.”

The decision of whether or not to open a regional office in a new market is often determined by set unit counts. Woodward, for instance, needs about 1,000 units to establish a regional office. If he gets more than 3,000 units, he’ll look for a second regional manager. Pinnacle will usually put a regional manager on the ground at 1,000 to 1,500 units, but that person usually works out of a property. With 2,500 to 3,000 units, the firm will open a regional office, and at 5,000 to 7,000 units, it will add a regional vice president. At 5,000 units and above, Pinnacle will also secure additional resources for marketing, training, and construction management. “Once that number gets above 2,500 or 3,000 units, we need to really support that person with some administration,” Graf says. “That office will have an investment manager or two and some admin support. When we grow that office to between 5,000 and 7,000 units, we will have three or four investment managers.”

A regional office, however, doesn’t necessarily need to be housed in a physical office. The term “regional office” means different things to different companies. For Woodward, “regional office” refers to a regional manager who mainly works from his or her car. If the manager requests a desk, he or she may set up one in a property, but 90 percent of what the manager does is mobile.

Barnes employs a similar strategy. “Ideally, a regional office would be located at one of our properties,” he say. “In the case that this isn’t feasible, we would look for available commercial space in the nearby area.”

4. Choose complimentary markets.

In addition to selecting regions based on where you will have enough critical mass, make sure the markets mesh well with your firm’s background and experience. For example, Fogelman is hesitant to enter markets where he won’t be able to hold properties long term, which is the company’s typical management philosophy. He is especially wary of advancing into new markets at the request of banks or special servicers when the business will likely be fleeting.

“We’re in the business for the long term,” Fogelman says. “We don’t think it’s a good use of our time and efforts to put all of our resources into a 100-unit, 1970s property that may be sold in 90 days.”

Following your instinct is key to finding a market that suites your management abilities. Danuser thinks Mark-Taylor’s experience in the Phoenix market will help the company in the Pacific Northwest. “We’re accustomed to having to work harder to get a renter,” she says. “We survived three down cycles in Phoenix and learned a few things by being in a down market.”

Specifically, Danuser thinks the company’s resort-style brand could play well in Portland, despite the fact that it isn’t quite as ritzy as Phoenix. “Mark-Taylor is a company that brands resort-style living,” she says. “That’s what we cornered the market on in Phoenix. We saw a big opportunity to do that in Portland.”

Choosing complimentary markets also is vital for owners who manage their own properties. When Doug Eisenberg, president of Urban American, looks to expand, he’s interested in markets that share similarities with his native city, New York. As a result, his firm, an owner and manager of 12,000 units in New York, is looking to enter high barrier-to-entry markets. “We’ll find markets that resemble the geographic areas that we’ve invested in to date—urban with dense populations, good school systems, good public transit, and good access to retail,” he says. “If we can find communities that resemble those where we’ve had success, we’ll be looking to invest there.”

5. Staff your properties wisely.

You decided to make the plunge. Now, it’s time to staff your new assets. When Fogelman Management Group moved into San Antonio and Colorado Springs, Colo., Fogelman knew he couldn’t rely on market outsiders to operate his properties. He needed people well-versed in the laws, customs, and rental tastes of those specific areas.

“When you go into a new market, you have to attract quality people,” he says. “When you’re new, it’s hard to do that if people don’t know your company. They don’t know what kind of career path there is and don’t know about the stability of your company.”

Other apartment executives agree that you need local expertise, but some firms like to start out with familiar talent. “We brought 14 people with us from Arizona, instead of initially hiring local people, and now we can expand and hire locals,” says Mark-Taylor’s Danuser.

Eisenberg of Urban American also thinks local when he staffs his newly-acquired assets. “We’re looking for a local operator who knows the lay of the land and will be an employee of our firm,” he says. “They will spend time with us at our headquarters learning how we conduct our business and learning about those things that are important to us.”