FEATURE ARTICLE, MARCH/APRIL 2010

STABILIZING MULTIFAMILY ASSETS
Apartment property managers face difficult decisions in a down economy.
By Jaime Lackey

During an economic downturn, apartment property managers struggle to fill units and cut expenses. While it is important to lease as many units as possible, managers have to consider the stability of the tenant base. While it is important to reduce operating costs, managers have to present attractive units, provide excellent customer service and advertise to reach more potential tenants. In short, every decision must be weighed against the current budget and the future viability of the property.

At properties that are underperforming, these decisions become more difficult. To find out more about the challenges faced by multifamily properties in distress, Northeast Real Estate Business recently talked with Fred Mehlman, CEO of Manhattan-based GFI Management Services Inc., and Angela Smith and Cynthia Batey, partners with Atlanta-based Strategic Management Partners. The two companies recently formed a partnership to offer multifamily property management services to owners of underperforming and distressed apartment communities nationwide.

NREB: How does the business of operating multifamily properties change in an economic downturn?

Mehlman

Mehlman: Controlling expenses and spending smartly become critically important. Prospective residents are price-sensitive. In many cases, owners can’t expect to charge a higher rent even if a unit is improved. Property managers and maintenance staff need to learn to repair and not replace. The same is true with marketing dollars — less expensive and innovative campaigns, such as Internet and social media advertising, can attract more residents with fewer dollars.

Smith: Everything changes when you’re operating a property in an economic downturn: the prospective resident pool, qualifying criteria, rental rates, funds to operate and even dealing with the residents living in your communities.

The prospective resident pool declines due to job loss and underemployment. People who could once afford the rental unit must now either have a roommate or move in with family. Multigenerational living is becoming more of a norm.

The way you market your community must change as well. Residents want social activities on the community premises that they don’t have to pay for, and you need to market your community with this in mind. What value will the resident receive besides a box? What can you do for them socially?

The qualifying criteria have to change as well. In the past, a bankruptcy or foreclosure would be an automatic denial. Today, you have to work with people more during the qualification process.

Dealing with existing residents has become a challenge as well. You may have excellent, long-term residents who suddenly lose their jobs. Do you let them leave or do you work with them and help them through this crisis? If they leave, will you be able to find someone better?

In today’s environment, rental rates are an increasingly important issue for existing residents. They know the market deterioration and rental rate adjustments or concessions for the existing residents, must be considered on a case-by-case basis. The cost of losing the resident is probably not worth the rent reduction that may have to be offered to get them to stay. In the past, we would let them leave, knowing they could be replaced at a possibly higher rental rate. Today the question is, can they be replaced at all and at what price?

In the majority of the U.S. markets, rental rates are down 3 to 20 percent. This is in addition to concessions of up to 3 months’ free rent. Thus, we are seeing recorded foreclosures and receiverships in multifamily housing. Owners just can’t pay the mortgage and operating expenses when faced with this kind of revenue decline.

With the lack of operating funds, the days of excessive print advertising, perfect turnkey units, and “fluff” are gone. You have to take an innovative, cost-effective approach to managing distressed assets. You must recruit staff for corporate and blitz marketing, which is inexpensive. Recruit residents for word-of-mouth marketing. When turning units, you have to find more cost-effective ways to make the units look good verses the easy route of replacing. The assets today need the strongest maintenance personnel available.

NREB: What are the most common mistakes that property owners make when managing a distressed multifamily property?

Smith

Smith: I call it the “cookie cutter” approach. When you do the same thing that you have done for the past 10 years at each of your properties, you won’t be successful. Every asset is unique and has a unique resident base. You have to look at each property and provide an innovative approach based on the physical and economic factors of the property. An example of this is the front entrance curb appeal. These days, we can’t afford the elaborate flower and landscape arrangements that owners paid thousands for annually. We have to find cost-effective ways to attract attention at the entrance at a lower cost.

Mehlman: Owners often look for the “quick fix,” wanting to take a 70 percent-occupied property to 90 percent occupancy in 2 months. Yes, that can be done — but only by lowering qualifications to a point that will ensure that the property will cycle downward again. It’s important to take a longer view and improve the quality of the resident base to stabilize occupancy.

NREB: What are the most important factors to stabilizing a distressed multifamily property?

Smith: Market, market, market. You have to go out and find residents to live at your property. Very few markets have an occupancy rate that allows the “sit back and wait” mentality, and gone are the days of endless advertising budgets. We have to find our occupancy through a unique marketing approach.

For the residents living at your community, it is critical that you provide the absolute best customer service, even with limited funds. You also have to work with and assist the residents who are facing economic challenges. Collections techniques have to be revised and a new approach taken to collect rent.

Mehlman: Keep the back door closed! Our efforts to improve occupancy by bringing in new residents will only succeed if we are able to retain the majority of residents already living in the community.

NREB: Within this niche market — the business of serving distressed and foreclosed properties — who are your main clients?

Batey

Batey: The majority of our clients are asset managers looking for higher returns, special servicers looking for a high integrity management team that is experienced and can get results, and owners who want more personal service and performance reviews that can be customized to their needs and asset objectives.

NREB: How does a third-party management company help the owner of a distressed property?

Batey: By understanding the owner perspective, goals for the asset and the critical need to reduce expenses, while still maximizing rents and occupancy. This can only be accomplished by an experienced and knowledgeable team that has managed these difficult assets and that can leverage results through tight controls, low-cost community enhancements, innovative and aggressive marketing techniques, and a pricing review of all vendor services to ensure maximum discounts or reductions, where applicable.

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