The management challenges of small markets

by R. Lee Harris, CRE, CPM

Mention small markets to many affordable housing management professionals and you will elicit a variety of responses. Generally none of them are good.

Why is there such trepidation on the part of the management industry to work in small markets? There are many reasons to validate the belief that small-market affordable housing management is a tough business. However, there are also ways to creatively turn the challenges into opportunities that can lead to efficient and profitable operations. Let's face it, as larger communities have become saturated with tax credit properties, the trend has been for state housing agencies to award more tax credit authority for projects in smaller markets.

A small market probably means that a property has fewer units than might be found in a larger market. Often, small markets are represented by properties of 24, 32, 42 or 48 units. This is a long way from the size that a property must be to begin to realize economies of scale. Usually, 120 units is where such efficiencies really begin.

Solution-A managing agent that can assemble a number of smaller properties in a particular geographic area can generate economies of scale, albeit in a somewhat convoluted fashion. Having a 32-unit property, a 42-unit property, a 48-unit property and a 36-unit property within a 50-mile radius can make small-market management more feasible. A single 36-unit property that is 200 miles from the rest of a management portfolio is a real challenge.

Finding qualified employees can be tough

It stands to reason that a small market has a smaller pool of talent from which to draw for employment purposes. It's even more difficult to find qualified people who are willing to work part-time, which is usually all that can be justified for many smaller properties. It is important, however, to find an on-site manager who can learn enough about tax credit income and verification requirements to do basic resident screening.

Solution-The property manager must be more creative in recruiting employees. Even though it may be harder to find an on-site manager with experience, it is possible to recruit someone with a strong work ethic and an ingrained sense of customer service. Advertising in the local newspaper may not be an adequate approach where creative recruiting is concerned. Personal conversations with local ministers and community service organizations will more likely yield positive results.

Owners or managers of multiple properties in small markets often choose to handle compliance issues in the corporate office. When just a couple of properties are involved, owners or managers might handle these issues themselves.

Hassles of travel

Small markets present several challenges with respect to travel. Obviously there is a cost factor that must be considered. Air travel will undoubtedly be expensive, if connections can even be made. Driving is often the only alternative, and it takes time.

Solution-A management organization can make the best of the travel dilemma by aggregating a group of properties in a geographic region. This can help spread the cost and time demands over several properties instead of a single apartment community.

Higher capture rates

The tax credit industry has recently been through a period of years where state housing agencies were committed to delivering affordable housing to smaller markets. In a number of instances, credits have been awarded for political reasons without regard for an appropriate balance between the number of units to be developed and the number of qualified units within the market.

Further, the market for a tax credit property is often identified as being much larger than the real market. Determining the capture rate (the percentage of qualified renters in a market necessary to fill a tax credit property) is essential to assessing a project's feasibility.

In a town where the residents are unwilling to commute long distances, which is common, the actual market is really just the town. Considering the market as the entire county would lead to a very inaccurate and artificially low capture rate of, say, 10%. A figure of 40% would be more realistic. As a point of reference, a healthy capture rate would be about 5% or less.

Solution-This is not a problem that can be easily solved. It requires the implementation of an extraordinary marketing effort as well as an acceptance that rents will not appreciably increase over a long period of time. However, if constant attention is paid to the marketing program, reasonable occupancy rates can be achieved and maintained.

Lots of rental homes

A particularly acute phenomenon inherent in small markets involves the availability of a large number of older homes and duplexes for rent. Typically these residences are offered at low rental rates and are often substandard in quality and upkeep. Tax credit apartment communities must compete with this product even though there is no question as to which is more desirable. The reality is that low- and moderate-income residents are extremely price-sensitive. If they can rent the top floor of an older home for $225 per month but would need to pay $400 for a newer tax credit apartment unit, it's not too hard to figure out which choice they will make.

Solution-Once again it is critical to "cast a wide net" in terms of marketing. A highly creative marketing program is a must, with a special focus on proving value. Rental concessions may also be necessary in order to minimize the price differential.

Higher turnover

When the economy is in a down cycle, employment conditions are more fragile. If a manufacturing plant closes or a business reduces its workforce, there are fewer employment opportunities for the displaced workers to pursue. Thus, should a resident lose his or her job, there is a greater likelihood that he or she will need to leave the market to find employment elsewhere. For this reason, higher turnover may occur in a tax credit apartment community during weak economic periods.

Solution-Again, marketing is the key to protecting a property against higher turnover. It all starts during a strong economy with full employment. This is the time when a savvy property management professional will work hard to diversify the resident base by attracting residents from many different employers. To accomplish this, the property manager must implement a broad marketing campaign that reaches out to a multitude of businesses and employers.

Fewer vendors/suppliers

It stands to reason that small markets will have fewer vendors and suppliers to serve a tax credit apartment community. There may be only one lumberyard, one hardware store and one roofing contractor. This means that the cost for goods and services may be higher, and there may be delays in delivery.

Solution-This is where building a regional portfolio of small properties in small markets can really pay off. By operating in several towns, a property manager can become familiar with a number of good vendors and suppliers that can be used in multiple markets. Plus, a larger management organization will build low-cost, high-volume relationships with suppliers that can drop-ship directly to individual property locations, wherever they might be.

Lack of high-speed Internet access

Communications are critically important to the success of any property. However, with small properties in remote locations, an extra effort must be made to ensure that on-site personnel do not feel isolated from their company. E-mail is proving to be one of the most cost-effective methods of communication. In addition, some of the newer financial software programs are tied to a management company's central server function via the Internet. High-speed Internet access is the only way that these programs can be utilized in any sort of efficient manner. Ditto for e-mail. Unfortunately, in many smaller markets, high-speed Internet access is not available.

Solution-Dial-up access is the only answer until such time as high-speed access is introduced to the market. The property manager must continually check with Internet service providers to determine when such service will be available. And, it's important to track both DSL and cable-modem options.

Expect to pay minimum fees

Owners of small tax credit apartments in small markets should expect to pay disproportionately higher management fees than with larger properties. Managing agents must be in a position to recover their costs for travel. Further, it doesn't really matter if a property has 48 units or 148 units - the cost to a managing agent for accounting and property visits is essentially the same. As a result, property owners should anticipate paying minimum management fees to obtain high-quality management services.

Small-market properties present a wide array of unique problems. A highly capable, experienced, professional managing agent is absolutely mandatory to protect and enhance the asset. Through a combination of creativity, the regional aggregation of multiple properties and intensive marketing programs, the challenges can be overcome.

R. Lee Harris, CRE, CPM, is president of Cohen-Esrey Real Estate Services, Inc., a Kansas City-based commercial real estate organization that has managed more than 40,000 multifamily units and 26 million square feet of commercial space since 1969. Cohen-Esrey is active in the development and management of Sec. 42 properties in 95 markets comprising 14 states, and it has extensive experience in restructuring partnerships and serving as a replacement general partner. The company's Web site address is www.cohenesrey.com.

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