How Cottonwood Residential Rides the Benchmarking
Cottonwood Residential has emerged as a leader in the use of competitive sets in benchmarking performance. Such "comps" can help apartment property managers with single-asset, community, and portfolio performance. We sat down with Cottonwood's Senior Vice President of Property Management Debra Spohn on this very topic, and she provided some interesting insights. What follows is our chat:
NATIONAL APARTMENT ASSOCIATION: Could you please introduce yourself to our readers?
DEBRA SPOHN: I am a 25-year veteran property management professional. I've worked for several management companies in the Salt Lake area and in Northern California. I owned my own management company for nine years and sold that in 2006 to come to work for Cottonwood as an asset manager. At that time, we had five properties and about 1,800 units. There were the three partners, the CFO, and myself as the company had been started in 2004. Since that time, we've grown to 128 properties and about 35,000 units in 26 states. So, you might say we've had a little bit of growth, and I've been a part of that, building the management platform and the team. It's been very exciting and very rewarding.
NAA: Our focus today is benchmarking. Could you give a basic description of what benchmarking is and why has it been so important to your company's success?
DS: Benchmarking is the comparison of business practices -- your performance against the best industry standards. I really see benchmarking as the litmus test to see how our properties' and our financial performance compare to the industry's. It helps us identify where and how we stack up against the market and against our competitors. With that analysis, we're able to adjust our business practices to achieve maximum performance.
NAA: What is the definition of "competitive sets" as they relate to benchmarking?
DS: You have to ask yourself some important questions in regards to leasing and retention. We ask, "Who are we losing prospects and our residents up for renewal to and why?" We find that answer by following up with residents and prospective residents. If they chose not to lease with us or renew with us, where are they moving to and why? We also look at our own assets and then look at our competitors. Are there similar properties attracting a similar demographic? Basically, it's all about "Who are we losing business to and why?" That's how we select our competitive sets. We call on our onsite people, our property teams, the regional VPs, on up. That 360-degree view helps us identify our true "comp sets."
NAA: Once a competitive set has been selected, how do you secure the data and ensure that it is accurate?
DS: We use a third-party company to produce our market surveys, and then we independently audit those results in-house by calling the comps and conducting online market research to verify the data. If we find there is a comp that is reporting results with a large variance from the market, that's a red flag. Perhaps they are not being truthful. Then again, they may be renovating or repositioning the asset. Or, they may indeed be truly outperforming or underperforming the market.
NAA: Do you make adjustments within the competitive sets to account for renovations, for having different amenities, and so forth?
DS: Yes, we do. We have to. It's not smart to turn your brain off and say, "Once a comp set, always a comp set." You have to make adjustments. Because if you don't, it will skew your data and your market averages.
NAA: Can you provide an example?
DS: For example, you have a lease-up community in your marketplace that is part of your market survey data. We don't calculate their occupancy and rental rates into our market averages, because that will skew the data. The goal is to identify your true comps and create a market survey that is apples to apples in comparison to your property. Again, it is important to remember that your comps do change because there may have been a major renovation or a reposition of an asset. Therefore, your competitor perhaps has now changed and you need to identify new comps.
NAA: Can you share some positive anecdotal results that you can attribute directly to your benchmarking practices?
DS: We had one property in 2013 that had 11 percent rent growth. We had taken over the asset in December of 2012, and we achieved that rent growth primarily by adjusting and truly identifying the true comps and producing a budget that gave the team there some good targets to meet. I don't think past performance should always dictate future performance. We shouldn't have the mentality of "We've always done it that way, and that's the way we'll continue to do that." There are a couple of other benchmarks that we use in our budgeting process. We, of course, look at NAA and their income and expense reports. We also look in our own portfolio in that same submarket. From those metrics, we'll provide our teams with a budget template with corporate guidance numbers of what they should achieve in terms of income and expenses. And, of course, we look at Axio and other market data research firms for rent growth to help provide us some targets on expected rent growth in [a given] submarket. By providing corporate guidance targets, it's really helped the teams and they've appreciated that guidance in knowing what we are seeing out there. It also gives them the backdrop for their targeted budget. Income and expense numbers are not just something we pull out of the air. There is some real research that has gone into them. With that guidance, it's really streamlined our budget approval process and given our staff some great benchmarks to hit in their budget processes. The budget and market surveys are property management's two primary benchmark tools that we all use to compare performance.
NAA: What advice would you have for those who have never done any benchmarking, but are intrigued by your success in this regard and may want to follow suit? How do they get started?
DS: Start with asking the question: "Who are my competitors?" Take the time to prepare and identify your comps. How do you know how you are performing if you don't compare or analyze your performance against a budget or a market? You could be leaving money on the table, and nobody wants that. With many of our assets, we've achieved consistently higher-than-market occupancy and rent growth. This has, in turn, increased asset value, generated better cash flow, and enabled us to deliver better returns to our investors. Everybody wants to know how they stack up and how they are doing, from the property and marketing level on up. The budget is the one document that is really the commonly shared goal between our asset management teams, our corporate team, and our investors.
NAA: Was there some advice given to you early in your career that has stuck with you?
DS: Never be satisfied with the status quo. Our culture is one of progress. How can we do better than last year, yesterday, and today? Don't assume that because it's always been done that way that that is the best way. It's about reviewing and fine-tuning and looking for ways to improve.
Purchase the 2015 NAA Survey of Income & Expenses.