The Easy Times Are Over
How to Give Yourself That Elusive Edge
By William Gottfried
Tough times for your rental portfolio lately? You may be thinking you should get conservative by hunkering down, reducing headcount, cutting software expenses, and riding out the down cycle. You’re welcome to try that approach, but you just might end up becoming that distressed seller everyone is waiting on.
At least for now, the easy times are over in multifamily real estate. In 2023, rents fell 0.7%, marking the second weakest year of rent growth in the last eight years, behind only 2020 and its pandemic-related wackiness. The national vacancy rate has been steadily rising for more than a year, nearly doubling since bottoming out at an all-time low of 3.9% in October 2021.
The hottest sunbelt markets and other usual suspects still see the most demand, but rents are flat or falling in 11 of those 12 hottest markets because they are oversupplied with new deliveries.
Additionally, today’s interest rate environment limits the multifamily buyer pool and reduces disposition optionality for many sellers. Until recently, multifamily ownership felt like a game of musical chairs and the game was easy. First, take advantage of record-low interest rates to buy basically any deal. Next, label it “Value-Add.” Then, renovate one or two common areas and upgrade 10%-15% of the units. Finally, sell to the next guy with all that coveted “meat left on the bone.” Your buyer would then do the same and on and on it went until rates went up and the music stopped.
As an operator, what do you do now? You’re looking at some combination of a limited CapEx budget, no ability to call capital, a looming floating rate refinance, stagnating or negative rent growth, lots of competition, few options to refinance or sell, and investors looking for answers about yield.
There will be winners and losers coming out of this reset. The winners will be the ones who innovate and proactively seek an edge while their peers get reactive and cheap, hoping for the best with no real plan.
Now that you can no longer count on 5, 10, 15, even 20% rent growth on the other side of your trade-outs, you need to be intentional about reducing variable expenses and squeezing as much yield as possible from your properties. The multifamily market may be deeply challenging, but it is also a time of great opportunity where you can separate yourself from the competition.
Five Steps to Stay Afloat and Give Yourself That Elusive Edge
1. Focus on renewals and occupancy
Where you used to wait excitedly for leases to turn over so you could capture that new peak market rate, now you need to get defensive. Get units leased and worry about rent bumps next year, even if it is more loss-to-lease than you underwrote. I promise you the two-month vacancy will hurt performance a lot more than slumping trade-outs and raise many more questions with your investors about your fitness to see them through hard times. At the end of the day, 90-93% occupancy can give you breathing room to start focusing on reducing other expenses.
2. Turn units fast
When move-outs do happen, make sure you are attacking the turnover process. Waiting to get units ready until they are pre-leased means you’re operating reactively and doing the minimum. How can you test rent rates, finish-outs, concession options, etc. if you never have any rentable inventory to work with? Challenging your property staff and make-ready technicians to turn units quickly also gamifies the turnover process and allows you to pay incentives and rewards to your staff. Finding good people is hard enough but retaining them is even more difficult. Align your incentives and pay the team well when they reduce your vacancy loss.
3. Tighten up your tech stack
Separate your “nice-to-haves” from your “need-to-haves.” You must be tech-forward if you want to get ahead as an operator/manager. Eliminate the whiteboards, notepads, and endless Excel trackers that give no real-time data, visibility, or accountability up and down your organization. Focus instead on your OpTech. What is going to cut vacancy loss? How can you truly measure resident satisfaction? What can you utilize to detect leaks in real-time? How can you get data about vendor performance and reduce contract services costs? Question everyone trying to sell you software or trying to renew an existing contract. If they cannot articulate exactly how they increase revenue or decrease those expenses, they’re not a need-to-have.
4. Prioritize customer service
No matter how innovative you get or how many AI chatbots you enlist, owning, operating, and managing apartments is still a customer service business. And nothing will sink you faster than bad customer service. When residents have issues, they want to be heard by an actual human being. Do not reduce headcount if it means slower maintenance times, fewer property walks and longer lines outside the management office. Instead, get your team running more efficiently. Getting units ready faster will free up your technicians and managers to do literally anything else such as dealing with those resident concerns, work orders, and keeping the property clean and attractive. And what a great way to juice renewals and resident satisfaction!
5. Work with like-minded partners
If you do not think you’re getting any edge from your current property manager, you’re probably right. If you are a management company still using whiteboards and notepads to track turns, you have already fallen behind. If your contractors and subs refuse to use smartphones or even email, then find new ones. Everyone in our industry must change their mindset. It cannot be a cram down from the top. You need smart employees and vendors who are eager to adopt new technology. Like-minded folks are out there, eager for their opportunity to unseat lazy incumbents who have gorged themselves on year-over-year double digit rent bumps who simply cannot adjust to our new reality.
Lead from the front on these initiatives. Your staff may have a hard time adjusting to our new market realities. If they are younger, they may have never seen a recession or a down-cycle before. It will take time and strong leadership to effect these changes, but if you pull it off, there are clear skies on the horizon.
