Many of the country's leading apartment firms are creating substantial new value for residents and owners through innovative approaches to property management, making property management an increasingly important element of the apartment industry. This column begins with a discussion of the factors behind the increased importance of management, then summarizes the primary approaches to enhancing profitability through management.
Over the last decade, several factors have encouraged multifamily firms to focus on creating value from property management.
* The federal tax reforms of 1986 brought a virtual end to the tax-driven approach to rental housing. Combine this with the end of rapid capital asset appreciation, and the days of automatic profit in rental housing were over. In the 1990s, multifamily firms were forced to look to property management to make an increased contribution to total company revenue.
* A significant portion of multifamily housing now is owned by institutional investors who have more demanding expectations of financial performance than the family and partnership ownership structures that predominated in the past. Institutions such as pension funds and mutual funds demand consistent and growing returns. These investors rigorously evaluate returns compared to alternative investments. Further, the securitization and public trading of apartment debt and equity creates public investor scrutiny and widely disseminated information on apartment company performance.
* The increasing size of the top apartment companies, as documented by the annual National Multi Housing Council 50, creates efficiencies in all aspects of property management, allowing delivery of better service to residents at lower costs.
* Ownership of apartments by real estate investment trusts (REITs) and the purchase of limited partnership interests by private company general partners gives managers increased, centralized control over their portfolios. This facilitates implementation of practices such as portfolio wide management strategies, bulk buying and centralized staff training.
* Many of today's renters demand more from their apartment company in services, amenities and conveniences. Today's discretionary renter, who can afford to buy but chooses to rent, evaluates management critically and will relocate if expectations are not met.
Customer service commitment
As a result of these motivating factors, apartment companies have formulated a vast array of management strategies. These management strategies can be categorized under three broad themes. First and foremost is the focus on resident or customer satisfaction that now pervades many apartment companies. In presentations at the Urban Land Institute's spring meeting, executives from Equity Residential, Post Properties, Avalon Properties, R&B Realty and Trammell Crow Residential discussed their companies' pervasive commitment to customer service. These firms are increasingly spending money to attract and train talented individuals who will make property management their career. These firms tie compensation to performance based on customer satisfaction surveys. And some firms offer residents free rent for any time beyond 24 hours that a repair request is unfulfilled.
A small sampling of the many specific services offered or under development by these five companies and other industry leaders includes: van service to mass transit; no-fee bank accounts; equipment for loan such as sports supplies, tool boxes and carpet shampoo machines; on-site sale of basic needs like stamps and light bulbs; twice monthly payment plans to match residents who draw their salaries that way; concierge services; wake up calls; exercise classes; and community newsletters, outings and other activities that build the sense of community which many residents seek.
A second major type of management strategy involves apartment companies using their size and access to residents to either directly supply retail goods and services to residents or, more commonly, to act as a conduit for traditional retail companies. Apartment companies are realizing that proximity to residents and their daily needs provides numerous opportunities to both earn new revenues and provide discounted, conveniently delivered products to their residents.
* Telecommunications: Apartment company alliances with alternative telephone and television providers, such as GE Capital-ResCom, is a prime example of the entry of apartment companies into the consumer service delivery world. Apartment companies make available large numbers of customers to the telecommunications provider and in return get discounted and potentially higher quality services for residents, as well as a share of resident payments in some cases. Camden Property Trust, a Houston-based REIT, is moving further into the delivery of telephone services by providing, on its own, more of the necessary hardware than under the typical telecommunications-apartment company alliance -- the anticipated result being an increased share of revenue for Camden.
The size of the market for direct selling of telecommunications is unknown. A key question for telecommunications and many other goods and services that might be provided by or through apartment companies is what portion of older, B- and C-quality properties are suitable. Insignia Financial Group recently announced plans to deliver GE Capital-ResCom services to a wide inventory of properties including older properties.
* Preferred vendor discounts: A host of discounted products are being offered to residents under arrangements called preferred vendor discounts, where apartment companies partner with retail firms to market products to residents in return for substantial discounts. Again, Insignia is an innovator. In January 1996, the firm announced an alliance with Hospitality Franchise Systems (HFS) to offer discounts on products that may include appliances, insurance, travel planning and car rental as well as products from top-name companies like Coca-Cola, AT&T, Pizza Hut and Zenith. The products and services will be marketed through an association termed "Residents Direct Access" by Insignia subsidiary Compleat Resource Group.
* Opportunities from residents working at home: The growing practice of telecommuting (working from home) will increase the multifamily company's advantage of proximity to residents' daily needs. The next horizon could be delivering both personal and business products to people working at home, which they formerly purchased at the workplace. Many new apartment communities offer business centers with messaging, mailing, photo-copying and computer services free of charge. But at least one company plans to turn business centers into revenue sources by bringing in stores like Mail Boxes Etc. and Kinko's Copies.
A third major property management approach involves reducing the cost of apartment operations and maintenance inputs with high volume and direct purchasing that cuts out agents and brokers -- call this "direct buying." Direct buying of apartment inputs is not new, but its potential to increase profits is substantial. Many firms now are circumventing local sales agents and buying directly from the factory. For example, Avalon Properties negotiated an agreement with a carpet factory and achieved an 8% to 12% discount below the price obtained through traditional intermediary suppliers. Through its Apartment 2000 project, JPI intends to utilize volume discounts with suppliers to build new apartments with superior amenities at the same rent levels as their competitors.
Pooled buying by multiple companies is an alternative to individual company purchasing. At least four firms -- Buyers Access, Professional Apartment Services, GE Power Buyer Service and Maintenance Warehouse -- offer apartment companies a range of supplies at costs typically below those that an individual company can negotiate. A subsidiary of NHP, Buyers Access purchases supplies for approximately 500,000 apartment homes. The downside of this approach is the potential loss of customized service provided by local suppliers familiar with specific apartment communities and their needs.
The pooled buying approach illustrates an important point: firms do not necessarily have to grow on their own in order to take advantage of many of the approaches discussed in this article. As an example from the retail selling side of the equation, Insignia's Compleat Resource Group (CRG) plans to offer discounts to any size apartment company based on the collective buying power of CRG.
* Utilities: Another example of pooled buying, this one in the utilities area, comes from the New Jersey Apartment Association (NJAA) which is taking advantage of natural gas deregulation to bypass a regional gas utility and purchase gas directly from the pipeline for its member firms. The NJAA claimed a 19% savings rate during the winter of 1995-96. Outside New Jersey's initiative, direct buying of utilities is undeveloped. One possibility in the early stages of development is retail wheeling of electric power. Similar to New Jersey's gas purchasing, retail wheeling means direct purchasing of power from the regional power grids, bypassing the electric utility companies.
Many of the approaches discussed here are in early stages of development. Some will not pan out, and some have failed to deliver on expectations. Some telecommunications companies, for example, have failed to deliver on their contracts with apartment companies. The wise apartment owner may wait to see technologies and methodologies mature before committing to certain capital and staff intensive initiatives.
The apartment company of the future will have the opportunity to operate a variety of resident services and sales businesses in addition to the core business of providing quality apartments. Companies will be faced with decisions about which businesses to operate themselves and which to leave to third parties.
The vast majority of multifamily housing is not benefiting from the management approaches described in this article. As a result, there exists an enormous opportunity for companies to both deliver new management approaches directly and to train other firms to provide these approaches on their own.
Apartment residents in communities offering the services mentioned in this article, such as state-of-the-art telephone and television packages, preferred vendor discounts and dedicated professional management staffs, have gained substantial value in recent years compared to residents of single-family homes. The amenities and services offered in many apartments today surpass those available in single-family homes.