Steps to Take When Revenues Tumble
By Les Shaver
This is the first article in our NOI Disaster Plan series, which looks at how apartment operators are exploring alternative ways to improve their performance and profitability by leveraging technology, assessing their staffing and senior management experience and implementing more mobile-based platforms that can improve the efficiency of key functions, such as maintenance work-orders, marketing or human resources.
With potential threats to profitability on the horizon, managers turn to technology and take a closer look at client selection.
Rents have been rising nationally on a consistent basis since 2010. For rental housing fee-management companies, those increases have led to profits, because most management companies work off of a percentage of their collected income, whether it is 2, 3 or 4 percent.
When things are going well, management companies say that some owners attribute their profits to market conditions, and discount their management company’s performance.
However, when rents fall, owners do an about-face and place some of the blame on the management company, ignoring the cycle of market conditions. In response, owners consider changing management firms or renegotiating their contract terms.
With shrinking rent growth on the horizon in 2018 in many markets, some management firms have taken bold steps since the last recession that will prepare them for any future turbulence.
Rick Graf, President and Chief Executive Officer of Pinnacle, says, “From our perspective, our margins today continue to improve. A lot of that has to do with rents increasing, because we typically get paid as a derivative of collected revenue.”
“[During the Great Recession], we made some cost cutting measures like most people did,” Graf says. “We saw our revenue stream cut by whatever rate the rent had dropped.”
At that time, Graf took on the risky strategy of investing in his operations, despite the downward trend. He began pumping resources into Pinnacle’s management platform by upgrading technology, marketing and its human resources group.
“By utilizing different banking software and integration software, we lowered our costs of providing a service, which obviously increases our margins and allows us to provide more services to our clients,” Graf says. “For example, if technology allows you to lower your cost of client reporting and accounting by a dime per unit per month or a quarter per unit per month, for example, and then you put that over 165,000 or 170,000 units, it brings in a lot of money.”
Graf says this investment strategy was risky because it was made within a challenging economic environment.
“My approach was to double-down and invest for the future,” he says. “This has paid huge dividends today. Our company has seen a dramatic increase in institutional client bookings. Our position in the marketplace has grown very nicely.”
An example of adjusting for recent shrinking margins is Washington, D.C.-based developer Kettler. Bob Kettler’s recent overhaul of his organization shows how seriously apartment firms are dealing with margin compression in all segments of real estate.
Kettler’s business touches single-family and rental housing, office and retail. He has continued to see his margins pressured in all areas during the past half-decade. A declining labor pool, steadily rising land costs and the D.C. region’s costly development process cut into revenue, forcing him to make business-changing decisions.
“When margins [profits] could be 15 to 50 percent on real estate deals, you could run a big volume of business through your shop—for-sale housing land development, tax credits, management and Class A apartments—and all would rise and fall with different market cycles,” Kettler says. “We could always scale up and scale down and move onsite staff members back and forth.”
But the changing economy, which required more technology investments in his portfolio and increased competition for land, labor and management contracts, had made it more difficult to justify each business unit. To get a fresh holistic analysis of his organization, Kettler turned to proven management leaders Greg Parseghian, former Chief Executive Officer of Freddie Mac; and Usha Chaudhary, former Vice President, Finance and Administration and Chief Financial Officer with The Washington Post.
The two looked at “every molecule of the business,” helping Kettler realize that there was duplication of efforts within each business division’s back-office functions, such as human resources and accounting. In response, the company created one “shared services group” to be used by all of its business units. Kettler says this reduced head-count improved margins.