In its quarterly financial reports, New York–based investment banking firm Sandler O’Neill + Partners lists several risk factors for a number of the apartment REITs it covers. Often, as in the case of Denver-based UDR and Chicago-based Equity Residential this past quarter, those risk factors include the “shadow market.”

Here’s an excerpt: “Shadow housing space from single-family homes, vacant condominiums and condo conversion projects provides alternative options for potential apartment renters in markets like Florida, Phoenix and Southern California in particular. As the housing market begins to stabilize, some renters are leaving apartment communities for single family homes.”

Those concerns make sense and crept up during the Great Recession, when some observers feared that foreclosed single-family properties would be turned into rentals. In a market where renters were seeking value, a four- or five-bedroom single-family house at $2,000 a month made a lot more sense to budget-conscious families and kids just out of college than a two-bedroom apartment at $2,000.

Despite the fear in the market, both during the downturn and since, there remains many reasons why the highest-level apartment owners shouldn’t lose any sleep over the matter. First and foremost, many of the foreclosed single-family homes popping up in recent years have been too far into the hinterland (think the Inland Empire in California) to provide any sort of competition for urban, or even close-in suburban, apartments. And as stories began to circulate about renters in single-family homes being booted out when their residences went into foreclosure, signing that lease became a little more of a perilous undertaking.

Those were certainly compelling reasons to dismiss any real shadow-market threat. But I’ve had my own, personal reasons for discounting the ability of single-family homes to lure institutional-grade renters. I lived in such a house for two years (though, admittedly, I was far less than an institutional-grade renter at that point in life). It was falling apart, the owners weren’t responsive, and it had basically been trashed by generations of 20-something guys (excluding myself and my college friends, of course).

But that experience was 10 years in the rearview mirror come 2010. That year, as shadow market fears began to materialize, I experienced another side of the story. My wife and I bought a Cape Cod in Arlington, Va., that sits near a rental home. In the Arlington tax records, the property is listed as being owned by a tiny LLC.

Perhaps it’s no coincidence that every property manager I’ve encountered since we bought our house is associated with an Arlington-based firm that makes “distressed-property investments.” The rental home was bought at the peak of the market in 2007, which should tell you all you need to know about the sophistication of these owners.

As my wife and I have watched various managers handle the house over the past four years, I feel like we’ve been taking a Master’s-level course in how not to manage a property. There was the busted sump pump pipe, which, after every storm, left water gushing into the rental’s foundation … and ours. Eventually—after some prodding, begging, crying, and yelling—the owner paid to fix the issue.

A couple of years later, as Hurricane Sandy roared into the Washington area, the owner waited until the day of the Superstorm’s arrival to send its beleaguered maintenance crew to the roof of the home to make some long-needed repairs (picture below). Thankfully, the workers finished the job before the brunt of the hurricane hit.


Recently, new renters have arrived. In our four years there, three groups of renters have lived in the house, which I’d guess is typical of resident retention in the shadow market. During this transition, the house sat vacant for more than six months (and the home was briefly for sale during that time). In the owner’s defense, the LLC did perform significant (and sorely needed) repairs. As is sometimes the case, there’s been a transition period as the new 20-something renters learn to obey the local noise ordinances, parking regulations, and speed limits that come with a residential area home to young families, small children, and seniors. After hearing their music blast a little late on a school night (yes, I’m a light sleeper, and when I’m woken up, I’m not happy), I decided to express my concerns to the property manager (or, at least, he appeared to be the property manager).

I’ll admit the management team was responsive. Maybe too responsive. The property manager decided to forward my issues, with my email and name included, directly to his tenants. To say this has created an uncomfortable situation would be an understatement. If this property manager ever decides to leave real estate, I think the care he takes in protecting personal information would make him a great fit at Target … or any major bank.

But I digress. My main point (other than getting a couple of things off my chest) is this—the next time someone expresses concern about the shadow market, think about the house near me. Management matters, and, often, the small groups, handling these homes just don’t have the experience, training, systems, employees, or scale to do it as well as the big guys. The difference between these small groups and large, national platforms is massive.

As Gen Yers begin moving out of these group homes and start to consider leasing their own places, competent multifamily managers need to sell their professionalism. When a potential renter is coming in from a single-family rental, he’s probably dealt with a less-than-satisfactory manager. While it may seem obvious to you, you still need to let them know why you’re different from their last landlord.