Customer service reps, take a seat. The next generation of multifamily property managers just outsold you. Armed with data, and allied with online leasing, pricing, and marketing programs, next-generation site-level professionals in the apartment industry are already quarterbacking complex business and sales plans that push revenue to the balance sheets of their apartment owner clients. In the current era of rent fundamental increases, site-level sales sophistication and tech savviness is where firms are going to define whether they can make incrementally more NOI for their owners, and everybody on the management side wants to prove it to them.“When I was hired 20 years ago, customer service was the huge focus. Now, I think [property management] is a sales job,” says Virginia Love, vice president of training and marketing for Chicago-based Waterton Residential. “Yeah, I want you to smile, and I want the residents to love you, and I want you to be helpful, but the bottom line is that site managers are the only people creating income for the company. I’m an expense, my boss is an expense, accounting is an expense, and the building is an expense. That lease is everything, and when push comes to shove, this is a sales job, and it’s a cutthroat one right now.”
For Waterton, that means handling the management of virtually all of the firm’s 15,000 units in-house. While the firm relied on third-party fee managers in its nascent years (and sometimes still buys into special-case scenario management, such as with the recent acquisition of 88 Leonard, where Rose Management was retained to help Waterton adjust to the Manhattan market), Waterton is now well-known as an in-house owner/operator, so much so that company COO Greg Lozinak doesn’t even get calls from fee managers trying to get his business. “I haven’t received one in a number of years, and I think it is pretty well-known in the market that we manage our own assets,” Lozinak says. “That said, what I see from my desk is that third-party managers have lately tried to sell their amassed economies of scale, which have helped them gain purchasing power in everything from paint to carpet for unit turns to insurance programs.”That’s exactly right, says Bob Faith, CEO of Charleston, S.C.–based Greystar Real Estate Partners, the country’s largest third-party management company, with 187,360 units in its portfolio. “For a while, we’ve been pushing that quantifiable sale,” Faith says. “If you choose Greystar, we’re going to walk you through the math of the additional cash flow you’re going to see on this property, whether from our insurance program or our execution of revenue management technology or our marketing initiatives.”
Greystar’s pitch of the quantifiable sale is significant. Despite the firm’s national footprint and resulting buying power, Faith, and other professional management companies, say they aren’t offering apartment owners a low-ball, big-box management solution, unlike others who, in a market that, crippled by the recession’s impact on NOI, have seen significantly compressed management fees. Faith, for one, thinks that’s a bit of a downward-spiraling, self-fulfilling prophecy. “Sure, you can go to a low-cost producer if you want,” he says. “But in our minds, you are cutting off your nose to spite your face.”With a rebound in rent fundamentals, strong volume in the acquisition and disposition arena, and a return to apartment development this year, opportunities for fee management expansion have opened up. Indeed, the largest fee managers are managing more apartments than ever: From 2007 to 2011, the third-party managers in MFE’s annual ranking of top 50 managers grew their portfolio heft from 476,092 to 634,334 units under management. And even if owners still have tight purse strings, the knee-jerk reaction to gravitate toward the lowest bidder on the block seems to be subsiding. Property management veterans suggest that the current market is transformative and specifically credit new technology—and the technologically optimized leasing office—as the fulcrum by which all multifamily markets will move in the next decade. While the jury is still out on whether bigger actually means better, it’s clear the era of old-school lease-up and rent-check–collecting managers is over.
The Big Squeeze
What remains to be seen is whether apartment owners are ready to pony up for the greater sophistication in operations, systems, and on-site management desired by the institutional investors that have assumed a larger role in portfolio consolidation. Equally up in the air is the question of whether a large, national third-party provider such as Greystar (or Pinnacle or Riverstone Residential) can more easily invest and leverage new systems and technologies compared with a more nimble boutique management firm.
“We think there’s been a lot of consolidation in property management, and we think that’s probably a good thing,” says Jay Hiemenz, CFO at Phoenix-based Alliance Residential, which manages 49,600 units. “I just don’t know how [the smaller providers] are able to keep up, frankly, with all of the technology that is now deployed for institutional property management. We absolutely have been and will continue spending a lot of capital on technology initiatives to stay in front of the curve in some areas and keep up with others.”
But some property managers argue that technology in and of itself is beginning to level the playing field when it comes to size and scale, and that off-the-shelf products can quickly professionalize smaller market players in contrast to their institutional peers. Of the 14,400 units surveyed quarterly by apartment research firm Axiometrics, for example, a full 25 percent have moved to revenue management, says Axiometrics president Ron Johnsey, and in the top 20 U.S. apartment markets, that penetration has reached 43 percent. “We have community and corporate Facebook pages; we use a resident portal for residents to pay their rent online and make maintenance requests online via computers or mobile devices,” says Jack Linefsky, vice president of property management for Clifton, N.J.–based Value Cos., which manages a regional portfolio across New York, New Jersey, and Pennsylvania. “Resident communication has changed, and it has changed for the better. Yes, when you have 45,000 apartments, you’re able to do things that smaller companies don’t have the resources or wherewithal to do. At 3,700 apartments, we’re just a nice, family-held company compared with the REITs. But with the technology we use, we’re able to feel like the REITs.”Management, Rewired
Indeed, developments in technology—not to mention the apartment consumer’s demonstrated preference for conducting business online—have alleviated property managers of administrative duties that had seemingly been institutionalized. For example, online leasing systems are also bringing prospects further through the application pipeline. Supported by call centers that answer the phones and help set appointments, the suite of today’s management technologies has the on-site professional set up to do one thing: close the sale.
Under New Management
Changes in market share among the country’s largest property managers suggest an evolution toward consolidated, scaled platforms.
In January 2009, Charleston, S.C.–based Greystar Real Estate Partners announced that it had acquired the 41,000-unit management platform of JPI. One of the largest property management acquisitions on record, it was also one of the last.? As the recession has pressed its weight on the multifamily industry since that deal, growth by acquisition has become a bit of a rarity, even if the talk of fee management “consolidation” has continued unabated.
“We’re continuing to see consolidation in our industry,” says Greystar CEO Bob Faith. “It seems the big are getting bigger, and we think it has something to do with some of the scale issues, but it also has to do with some of the consolidation of the ownership in the multifamily sector and more institutional ownership of the product in general. Over the course of the recession, you just saw a lot of the competition drop out.”
Indeed, since 2007, the six largest multifamily property managers have seen their unit count grow from 858,221 units to 881,057 units, or roughly 3 percent. Sound incremental? Consider that when traded REITs (which manage only their own assets) are eliminated, the remaining companies—all fee managers—have boosted unit count by a whopping third, from 476,092 to 634,334 apartments under management, according to the annual MFE top 50 managers ranking. What’s more, the threshold to get into the top 50 is increasing. In 2007, Lane Co. and Corcoran Jennison rounded out the list at 22,000 units, preceded by AMLI Residential with 22,636 units. By 2011, Ginkgo Residential (29,029 units) and LEDIC Management Group (29,142 units) had reset the bar for top 50 inclusion at just under 30,000 units.
So will M&A activity return to the fee management arena as the economy and rent fundamentals improve? That question will likely be answered by sellers, who, like most businesses divesting assets, are still looking for pre-recession multiples. “A few groups did small acquisitions over the past few years that helped them strategically by creating a presence in markets in which they were looking to expand,” says Terry Danner, president of Dallas-based Riverstone Residential. “Today, you have sellers that have lower EBITDAs because rents and fees declined, but expenses continued to trend upward. So sellers aren’t willing to sell on a multiple of today’s EBITDA, and buyers aren’t willing to buy on old or projected EBITDAs.”
“Yeah, I want you to smile, and I want the residents to love you, and I want you to be helpful, but the bottom line is that site managers are the only people creating income for the company. I’m an expense, my boss is an expense, accounting is an expense, and the building is an expense. That lease is everything, and when push comes to shove, this is a sales job, and it’s a cutthroat one right now.”
“The whole idea of leasing online is changing,” says Terry Danner, president of Dallas-based Riverstone Residential, a third-party manager of some 162,182 units nationwide. “It used to mean you conducted a search online and narrowed your choices down to the one or two you were serious about visiting. Today, it means you conduct your search online, apply online, get screened online, and execute your lease online, so even marketing is much more sophisticated with the development of web platforms that allow residents to go all the way from search to online lease execution.”
And most apartment operators want all of that functionality plugged in and ready to roll when a management contract is signed. In the greater Washington, D.C., metro area, McLean, Va.–based Kettler has used its systems expertise to help close new management deals that are taking the firm into new markets, as the merger/acquisition stage in the fee management sector remains dark (see “Under New Management,” opposite). “We’re being asked to do more, and adding that technology requires more expertise to train your teams and manage that process,” says Kettler Management president Cindy Clare. “Yet fees are still going down or staying stagnant; they’re certainly not increasing. And there’s still pushback on charging additional fees [for extra services and admin]. Developers are starting to build again, and that offers a great avenue for fee management growth, but they have to start making money first.”
A New Professional
Clare hopes Kettler can continue to grow its mid-Atlantic platform by assisting developers with key lease-up services as apartment construction steadily returns. Apartment acquisitions by Kettler’s existing partners should also help to add bulk to the regional, boutique management firm. In April, Kettler gained management of a 1,490-unit portfolio in the Hampton Roads area of Tidewater, Va., when the firm partnered with Washington, D.C.–based Federal Capital Partners to take down the portfolio for $87.9 million.
“There are two parts to our future growth,” Clare says. “The number of people looking for our management services has definitely picked up since the recession, particularly in D.C. and other markets on the East Coast where fundamentals are improving. But as the institutional investors have gotten more and more involved in the apartment industry, their expectations are that our site managers are not just customer service experts; they are business managers managing to bottom line and to budget,” Clare says.If you think the reprofessionalization of on-site staff isn’t that dramatic, think again, says Danner, who adds that first-movers and progressive management firms large and small are already outpacing old-school operators. “Property management will always depend primarily on the quality of the on-site staff and the regional manager, but property owners today demand so much more than that because they’re so much more sophisticated and knowledgeable on industry trends,” Danner says.
Hopefully knowledgeable enough to recognize value and ROI over initial cost when they see it, says Faith, who isn’t just out there touting a new breed of tech-optimized and balance sheet–savvy property management; he’s trying to sell it, too. “It is a completely different conversation now, and technology is finally allowing us to have the data to support a quantifiable sale,” Faith says. “I used to say it was a relationship sale, and it still is; that will never go away. This business is about people. But when you can back that integrity up with a quantifiable sale, when you can say you’re going to love working with our people, and we’re going to make you more money, and let me prove it to you, and here’s how—that changes everything.”
