Property assets can fall into disrepair in many ways and for many reasons. Often, just walking or driving by an asset will show signs of dis-repair or a lack of care. And that’s without stepping on property! Why are potentially valuable assets left to fall back into the sand? There are a myriad of reasons, of course. Following are the categories that most often result in assets looking like they’ve been beat with an ugly stick. The next time you see one it is probably due to one of the following factors.
Inattentive Ownership. Owning real property assets isn’t the same as knowing how to manage real property assets. This distinction is made clear every day. To me, its in the same category as making a baby versus raising a child; these are two completely different skill sets, yes? Thus, if ownership is unconcerned about operational efficiencies, property presentation and safety, then all is lost (eventually). Ownership that has a vested interest in asset operations on paper only requires professional property management to succeed. Of course, asset owners are not required to be professional property managers, however, they should be engaged in the selection of quality management for their investment to have and maintain future value. Institutional owners hire professional asset management for this function.
Non-professional Management. The success or failure of any investment class asset rest with management. There is professional management and then every other type of management; piecemeal, unqualified, inexperienced, half-baked, etc. Knowing that management is a key component to successful operations…why use anything else? Some will say that it is too expensive. Well, so is incompetence and on-the-job-training for the ill-equipped. The property suffers, yield suffers, turnover increases, expenses are untamed. Non-professional management brings no upside potential.
Antiquated Financing. Getting the capital stack right is no small task, particularly in an ever-changing marketplace. Considering that appropriate leverage means different things to different people, the best approach is to align the financing package with the long-term objectives of the primary owners. With this structure, you are applying the same perspective to individually owned assets as you would institutionally owned assets. Each property should have its own plan for achieving asset-level goals, first, followed with guidance about intended term of ownership and how the asset-level goals fold into investor objectives.
Changes in Market Dynamics. Markets do shift. Markets do deteriorate for all sorts of reasons. Changes to the number and type of jobs within close proximity to residential assets has significant affect on the value of these assets. If a “boatload” of jobs disappear there is little a property can do in the short run to usurp this. Earlier this decade every class of apartment property in Houston Texas had specials including two-months free with a twelve month lease. This changed with the oil boom returning. Same for Detroit metro with auto makers going from producing 15M cars a year to 11M. That type of free-fall decimates entire submarkets.
So before making “absolute” assumptions about why a particular property is looking dowdy (or worse) consider the cause could be any one of the above or a combination of these with other factors sprinkled in. Remember the bed bug scare in New York City? Flooding in New Orleans? The “assume” word runs in the same circle as “if”. These are seldom good words on which to make sound business decisions.
This blog is intended to be informational only and does not provide legal, financial or accounting advice. Seek professional counsel. Multifamily Insight