As interest rates hold steady, and sales of multi-family assets favor mainly those willing to sell below replacement cost, many owners are sitting with underperforming assets and a pressing need to refinance. In times like this, it’s even more important than ever to have the strongest property management team on your project. The right manager and support staff can help maximize your proceeds. The wrong team can prevent a refi or profitable sale altogether.
As asset managers and owners, we spend a lot of time with numbers: reviewing them, analyzing them, running and re-running them. They tell us if our rents are in line with the market. They show us revenue gaps that can be filled with ancillary income. They tell us we’re over- or under-spending somewhere. They illuminate incorrect assumptions. The list goes on. But what numbers alone can’t tell us is the “why”. You’re over budget in marketing or maybe payroll, or occupancy is falling. How often do you see a statement like “Occupancy is off budget because we didn’t obtain the projected leases” on a variance report? How can you fix a negative variance if you’re not identifying the root cause?
Many financially focused AMs will recoil at the following level of evaluation. I get it. However, I can attest that in environments like this when we’re holding assets longer than planned, properly utilizing the information collected during a thorough site visit can turn an asset around in 90 days or less.
My asset management walks resemble what you might expect a Regional Property Manager to do. However, I’ve found that when a deal isn’t performing as expected (aside from product itself), it’s because of one of three things: lack of staff training, insufficient oversight, or apathy. We are fortunate that our industry is full of high-performing individuals and teams who contribute to the success of our assets. But sometimes we don’t get those individuals or teams, so how do we determine this? How do we uncover if the property management team is the reason for slow leasing, high turnover, traffic problems or high operating costs? First, we need to be honest with ourselves about the quality of the asset itself and how it measures up to the competition. Then assuming the product is not in question, we can turn our attention to operations.
The following is how I use a site visit to uncover potential management issues. Alone, none of these are cause for alarm, per se. But 100% of the time, I have found that two or three of these red flags together mean there’s a problem with your team. Performing this once a year is plenty, with a follow-up in 30 days if issues are found.
- The most important rule to a walk like this is the one management finds most upsetting: whenever possible, perform your walk with no more than 24 hours’ notice. This is frequently the only way to get a clear picture of what’s happening on your property. Ensure the Manager or Regional Manager is there when you walk. Upon arrival, observe the following:
-
- Where is the leasing staff? If your leasing numbers are low, and you’re not greeted immediately upon arrival, that’s a big reason why. If the staff is gathered in a backroom or office, or visibly engaged in a meeting, prospects will feel they are interrupting rather than welcome. They may even leave rather than wait or interrupt.
- Is the leasing office clean? Are workstations free of clutter? Does it smell nice? If the first impression is one of dirt or an off odor, the conversion ratio will be negatively affected.
- Are there other prospects waiting to be helped? Low traffic numbers on paper that are contradicted by a full leasing lobby can indicate either the staff isn’t logging traffic, or there aren’t enough leasing people to get to everyone. For example, if you notice the staff huddled somewhere and you aren’t immediately greeted, the former is probably the issue. If no one is around because they’re out on tour, it’s likely due to the latter.
-
- Pull the Aged Vacant report. Walk the oldest three vacants (not just the models). Doing this is going to reveal more about property operations than any other single thing you review. Here are some examples of things I’ve found when walking aged vacants that are difficult to discern from a financial statement.
- The unit is freezing cold or boiling hot, or the utilities are turned off. This means only one thing – no one is walking vacants/managing vacant utility costs. (In general, thermostats should be set on 85 in hot weather to prevent mold and mildew, and on 65 in cold weather to prevent freezes). If there is no power in the unit, it’s a sign bills may not be getting paid.
- The unit isn’t made ready. Unless you’ve expressly stated that there’s a cash shortage, every unit should be ready within a week of becoming vacant, or two weeks if replacements are required. Units sitting for a long period of time must be ready, or they won’t lease. They’ll continue to sit there. Units that have been sitting unready for 45+ days are an indicator that management is trying to save money in order to remain in budget. Doing so will almost always lead to poor leasing performance and maybe even payment of an unearned financial-based incentive fee.
- Appliances, fixtures, or parts are missing. This is called cannibalizing a unit, and it’s when management saves money by using a unit or units to maintain others. If there is not a cash shortage, this practice provides a false view of operational costs and sets up the property to fail.
- The unit is far from the leasing office. If this condition exists, it’s likely that units that are closer to leasing get leased first. In itself that’s not an issue, but it’s an indicator that the focus of the staff isn’t where it should be.
- The corridors are messy or smelly. This means either no one walks the property, or they do and don’t remedy what they see. Dirty corridors affect both leasing and retention – customers perceive this as management not caring. One time seeing this is excusable, but if it’s not improved on your next visit, it’s a problem.
None of the above conditions should be present in the models, since models are presumably shown daily. However, red flags in models include:
- Not clean or smells bad. The cardinal rule of apartment leasing is to NEVER show a model that isn’t perfect.
- The lights aren’t on. Models need to be opened every morning immediately upon arrival. Dark models indicate misplaced priorities.
- Ask to see their digital marketing analytic reports. On-site staff members are not digital marketing experts, but they’re often expected to be. You may be asked “which reports?” to which I suggest responding that you’d like to see whatever they’re using to determine if their strategy is working. What they give you will help you determine if the right people oversee your internet presence. At the bare minimum, you want reports that show the following:
- Visitors, unique visitors, pages visited, time on the site, and bounce rates. This is essentially a website report card.
- The types of ads being run, how many clicks they’re getting, how many clicks convert to a lead, and what each costs. Large dollars spent on ads with low conversions can mean no one is paying attention. Clicks are activity, they are not results: focus ad dollars for conversions. Also, if no dollars are being spent on social media ads, this is an indicator of an unskilled digital manager. (If anyone tells you that Facebook ads don’t work…run).
- Keyword performance. Is too much money being spent on terms that aren’t performing?
- Lead sources. Look for the sites people are coming from (“referring sites”). If a fortune is being spent on ILS that aren’t converting to leads, it’s another sign of a digital management problem.
Compare the conversions documented in these reports to the call/traffic reports. They should very closely correlate. If leads/conversions shown in the digital analytics reports are significantly greater than the traffic counts, a ball is being dropped somewhere.
There are countless ways to analyze digital marketing programs. These are the minimum data points management should stay on top of.
The above items are guaranteed to illuminate any management problems that may exist and directly tie to specific line-item variances. There are also a few other areas worth reviewing that, though they may not tie directly to an expenditure, can detrimentally affect property performance overall.
- Leasing reports. Is one person taking all the traffic? Is only one person getting all the leases? This can indicate individual performance issues that are dragging down the team as a whole.
- Are the lights on? Music playing? TV controls easy to find? Are fires lit? There is no value in amenities that aren’t enjoyable and easy to use.
- Google Reviews. Read them.
- Resident engagement. If you have a resident app that features resident engagement of any kind, determine if resident comments to management correspondence or other posts are “turned off”. Silencing residents rather than (publicly or otherwise) addressing their concerns can be a sign of an outdated operational philosophy and is almost guaranteed to result in poor reviews and avoidable turnover.
- Shopping reports. For the most part written shopping reports hold no real value. Shoppers often skew ratings based on if they like the person, and don’t reveal things like how long the shopper waited to go on tour, or if the leasing person stands in the kitchen of the model while the shopper walks around. Require video shops and watch them start to finish.
Throughout my tenure in Multi-family, I’ve seen too many AMs and owners dismiss these subtle signs as no big deal. However, these details are what make or break the performance of any asset. It’s always the most basic quality control items that make the most impact. It’s the property that covers these bases that steals your prospects and residents and outperforms the rest of the market.
Now that you know what to look for, how do you fix it? Sometimes the team that is causing all the red flags may not be the team to fix it. They may simply not have the skills or support needed to turn things around. I provide not only audit services, but also am able to apply the audit findings to a strategic plan and turn asset performance around quickly. Finding and correcting these issues will ensure refi proceeds are maximized and NOI is primed for a healthy sale when the market turns.