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.”