Charleston, S.C.-based Greystar Real Estate Partners scored the largest single fee management deal of 2009 with the acquisition of Irving, Texas-based JPI’s property management division, which brought 41,000 new units and 1,150 employees into the Greystar portfolio. On July 15, the firm may have claimed 2010's largest third-party transaction when it announced that it was assuming management responsibilities for the Irving, Texas-based Archon portfolio—which represents 7,600 units in six states.
“My gut tells me this will be the largest fee management deal in 2010,” says Greystar southeast regional partner Andrew Livingstone. “There are a couple of other opportunities still out there on some smaller regionally-based portfolios that may or may not happen this year, but I would put them in the 3,000- to 4,000-unit range, and those are more likely on a 20-month horizon versus a 12-month horizon.”
Indeed, multifamily property management firms are anticipating the emergence of selective market opportunities over the next two to three years as the economy improves. They will be looking to asset managers of both traditional and distressed apartment portfolios, who are beginning to make strategic decisions after analyzing their hold terms, dispositions, and the allocation of corporate resources toward acquisition and development divisions.
Shift in the Marketplace
Firms that had turned inward toward operations and property management as development divisions were shuttered and the transaction market dried up over the past two years are expected to begin issuing calls for competitive bids on portfolio management as rent fundamentals and the multifamily construction markets rebound.
Archon, for example, sought out third-party management as it turns its corporate attention on acquisition opportunities. “Archon is looking to focus on real estate investment and wanted a partner to continue what they had started, mainly the long-term investment into the quality and innovation of their management platform,” Livingstone says.
For fee managers that have not been in on the national or regional portfolio bidding action, smaller groups of assets (from one to five properties) from submarket operators have begun to test the new management waters. Newport News, Va.-based Drucker and Falk, for example, closed deals this spring on stand-alone management contracts across the southeast. In the first quarter, the firm added six communities to its management portfolio in Virginia and North Carolina.
Regardless of portfolio size, property managers say that winning bids in today’s market remain as competitive as ever, and firms expecting to merely ride the market tide of improving rent fundamentals and Gen-Y demographic surges likely have another thing coming. “For the management companies that either go back to just collecting checks or otherwise take their time implementing rent increases, those owners are going to look around and say, ‘Hey I hear everything is getting better, but I’m not seeing it in my returns, so maybe I should start shopping,’” says Irvine, Calif.-based Western National Property Management president Laura Khouri. “We think that dissatisfaction will be a great growth opportunity.”
Still other firms remain focused on the unwinding of distressed assets through the CMBS maturities pipeline. “The opportunities for managing for special servicers are really just beginning,” says Dave Woodward, CEO and managing partner of the Denver-based Laramar Group, which in the San Francisco Bay area has added some 3,000 units to its management roster via special servicers—a majority of them from the collapsed Lembi portfolio. “If you look at the volume of maturities between 2011 and 2013, the possibilities for fee management assignments [of distressed and REO assets] its just tremendous.”
Waiting for Synergies
While Western National likewise is communicating within its apartment finance network to gauge the pulse of distress, the firm has yet to see a deluge of opportunities. “We have also not seen a whole lot of distressed assets coming out into the market yet,” Khouri says. “We do hear a lot of buzz regarding those opportunities from our institutional partners, but the truth is that more and more of them are renegotiating those loans and giving stays because they don’t want the product.”
Ultimately, asset managers are likely to look for a strong culture match in addition to operational and technological expertise when doling out fee management contracts in the new economy. “When it came to operational systems and software expertise, [the Archon/Greystar deal] was a no-brainer because we aligned very well,” Livingstone said. “That alignment always provides confidence in a more seamless systems transition.”
Regardless of whether the Archon deal ends up as the pinnacle of 2010 property management transactions, Livingstone says job No. 1 remains squarely at the local level. “Even on a deal where you have fewer properties and units and team members, you still have just as many areas that have to be integrated,” he says. “Less volume, yeah, but just as much focus, and for that you need local operators. Certainly the national backstop and economies of scale play into success, but it still does not play a lead role.”