• Looking at the insurance issue
  • Helping reduce owners’ liability

“Ten or 15 years ago, owners typically viewed their management company as a rent collector and a parking-lot sweeper. Today, the management company is viewed as a strategic partner,” said Brad Forrester, president of San Diego-based ConAm Management Corp., which owns and operates 22,000 apartment units and manages 24,000 more on a fee basis.
High profit margins for managers and minimal service once were the rule. But these days, managers survive on much thinner margins, while providing more and better-quality services for owners, he said.

Owners want to squeeze even more profit out of their existing assets. To justify increasing rents, owners and the managers that work for them must be more service-oriented than ever. On the cost side, they are paying significantly lower fees for third-party management services.

“The challenge [for property management companies] is to learn to operate in this environment, capitalize on economies, and make use of technology to improve productivity,” Forrester notes.

One reason for this is increased apartment ownership by real estate investment trusts and other institutions. Though they generally manage their own assets, they’ve raised the bar across the board, said Stan Harrelson, president and CEO of Seattle-based Pinnacle Realty Management Co., which manages 108,000 apartment units in 47 states, with ownership of about 20%.

“To compete with [higher] expectations, third-party providers have had to grow and reach a level of sophistication they may not have had in the past. Realizing that we are all competing for the same talented people in the business, a third-party firm has to be doubly sensitive to its compensation programs and the autonomy of the direct property manager,” Harrelson said.

Apartment management companies say they offer many advantages that smaller owners cannot duplicate in-house. In particular, large management companies say they can better recruit, compensate, promote, retain and train top employees. A survey conducted with larger apartment owners by the National Multi Housing Council (NMHC) revealed that the median average salary for West Coast vice presidents of property operations was $125,000, but in the Northeast and Southeast regions, the median was only $100,000, or 20% less. The median total compensation was $158,200 on the West Coast, but only $122,800 in the Northeast and $127,800 in the South.

Looking at the insurance issue

Apartment management companies say they can also obtain lower insurance rates, a very important issue as premiums rose and coverage shrank in 2001. Third-party managers can also obtain bulk-purchasing discounts and better evaluate property management software, high-speed data lines, computer systems and other technology. Finally, they claim they have more expertise to ensure compliance with fair housing laws as well as federal, state and local rental regulations.

“For some owners, the benefits are very tangible. It’s not uncommon for the client’s insurance savings to more than pay for our management fee. Other benefits are more intuitive. We can provide better customer service, which translates into higher occupancy and resident retention, which means lower turnover costs,” Forrester said.

Yet another point concerns the owner’s ability to obtain financing for acquisition, rehabilitation, remodeling or other property-related purposes. Many lenders look kindly on the involvement of a reputable property management firm, Harrelson believes. “The underwriting party will ask how management [of the property] will be handled. If somebody doesn’t have a presence in the area, or expertise in any area, the lender will [give that] substantial [weight].”

Good third-party managers can also bring new ideas to an owner’s business. For example, Forrester is trying to create a competitive advantage for his company. He said rent-to-own programs that credit a portion of rent to the purchase of a house from a participating builder, and apartment community Web sites that offer print-out coupons for local services, are “somewhat interesting,” but not necessary materially advantageous.

Another trend is expanded concierge service in luxury apartments. “We are training [employees in] many of our communities [to provide services] as though the residents were staying in a hotel,” he said. “We are able to offer residents such services as tickets to events and restaurant reservations.”

Having a concierge or resident coordinator on staff will become common,” predicts Denise Bailey, vice president of marketing for Legacy Partners Residential, Inc., in Foster City, Calif., which has 30,000 apartments under management, half company-owned.

Helping reduce owners’ liability

Another trend is requiring renter’s insurance, which lowers the owner’s exposure to liability and casualty risks, said John Gorske, vice president of Western National Property Management in Irvine, Calif. The company manages 22,000 apartment units, of which 13,000 are company-owned. Renter’s insurance is required in all of the company’s owner-managed properties and roughly three-quarters of the fee-managed properties.

The owner earns a small referral fee if the resident obtains a policy from a management-recommended insurance provider, but reducing losses is far more important than that, Gorske said. Gorske said tenants often are required to maintain minimum liability coverage to pay at least some of the owner’s deductible in case of an accident. Contents coverage usually isn’t required.

Gorske mentions the trend toward transferring utility and garbage collection costs from the owner to the residents themselves. The cost savings can be substantial, not only because the residents are paying the tab, but also because pro-rating the bills discourages wasteful use. “We found that [billing residents] promotes conservation of water, which is very important, especially in California, where water has continued to escalate in price,” he said.

The property management industry is being inundated with innovations in software and Web-based services, such as online rental applications and preliminary approvals, online rent payment services, online credit-checking services, apartment complex Web sites and portals, Windows-based and Web-based property management programs, and dial-up real-time management information systems.

Much of this technology eventually may prove useful, but so far, it is little-used and largely unproven. Some new technology “makes the resident experience materially better,” but other products are not particularly useful, Forrester said.

What’s more important is the development of Windows-based management systems that “are now actually worth the expense, effort and risk of employing them,” said Harrelson. “To date, there really haven’t been any legitimate Windows applications for our industry.”

Gorske also advocates a go-slow approach to new software. “A lot of [new technology] won’t make it, won’t catch on, or will be over-saturated in the number of suppliers providing the same service. Several Web-based systems are up and running, but they are on a small scale.

“Everyone is waiting for the Web system that provides the whole package of services. The big companies that dominate the market and support hundreds of clients are still working on their packages,” he said.