Help: How to "Multifamily Asset Management"
Hi all- I'm an asset manager and I recently got a few multifamily properties added to my portfolio of commercial assets. I have zero experience in actively managing multifamily (these are class A, 300+ unit complexes, some stabilized, others in year 1 lease up).
I know enough to fumble my way in conversation. Loss/gain to lease as the difference between inplace and market rent, retention ratio, rent control caps, pre-leased vs occupied, concessions (free rent, look and lease), etc. But I don't have the fluency or "nose" for managing multifamily. My eyes glaze over when I read the property managers weekly leasing reports. Concepts like ATR (average trade out rents) and Loss to lease (beyond the textbook definition) just don't click for me. I understand that we want ATR to be positive, for both new leases and renewals. But there's also needing to balance this with occupancy. We don't want a Gain to lease while remaining at 80% occupancy, right? 95% occupancy with a severe Loss to lease isn't good either, is it? And isn't "market rent" a moving target, or else it becomes stale? Whether you adjust market rent week over week, month over month or YoY, or don't touch it at all- it seems that any of those scenarios could lead to all sorts of distortions to your Gain/Loss to lease metrics. Also, how is "market rent" typically defined- is it what you're achieving (and for this, is it what you achieved just 30 days ago, 90, 180, in the last year...) or is it what you're asking today, or is it what you budgeted to ask at the start of the year, or is it something else?
Sorry for the word vomit- I'm just trying to wrap my head around how to manage to these theoretical concepts. Like when to drop rents vs. reintroduce/increase concessions. What I can do/suggest when the community manager says they "saw only 3 pieces of traffic this week with 2 applications, 1 net lease and 2 notices to vacate" (bad).
Anyways, does anyone have any good resources on understanding multifamily financials (primarily RE: revenue) and asset/property management? Ideally looking for a crash course or some browsing material, or a podcast. Also open to reading any insights you guys have into the hyper-active, hands on approach required of a multifamily asset manager!
Hah, I think you need to start with the basics and not try to overcomplicate it from the get-go. While I understand what it measures, I have never used the term "ATR" in my life. Multifamily is generally pretty straightforward.
Try to think of it this way: every month you have a starting occupancy. Hopefully that's around 90%-95%, so for a 300-unit building, let's call it 280 units occupied and 20 units vacant, or 93% leased. When this building was initially delivered, it was probably phased, and there was an underwritten absorption rate that more or less sets the tone for the future of the building given standard 12-month leases. So the developer wanted to get fully stabilized in a year and not "leave their back door open" during lease up, they would have needed 25 leases per month (300/12). That means, every month in perpetuity, approximately 25 leases will come up for renewal.
This varies market to market, and product type to product type, but 50% renewal is usually considered pretty good. 2-3 months out, the property manager will send renewal letters to these 25 tenants. In a healthy market (meaning, rents aren't falling) almost all of them will have some loss to lease, either because rent increased since they signed their initial lease or because they were given some sort of concession at signing and that concession "burned off." Your job is to minimize that loss to lease and mark them to current market rent, which is what that unit is listed for on your website. Market rents can be adjusted monthly via market surveys conducted by junior employees that you review, or there are certain programs that adjust it daily based on market activity. Check with your property manager to see what they use and then do your own research into what is effective. I always liked controlling pricing myself, but I'm old and egotistical.
BUT, it isn't as simple as marking it all to market, because it is in your benefit to keep them in the unit paying rent. When they move out, you have to spend money turning the unit and you lose money for every week that unit isn't occupied. So, if market rent is 4% above what they're paying, maybe you try to entice them to stay with only a 3% increase. Generally, if your renewal rate is around 50%, you know you're approaching this correctly. If you're only getting 20% renewals, your pricing is way off or the experience of living at the building is piss poor. If you're getting 70% renewals, you're probably leaving some "meat on the bone." Different companies prioritize rent growth vs. occupancy too, and in a down market (aka now) there are a lot of benefits to keeping occupancy high.
Some of this gets personal to the point of almost dogma. For instance, I would never introduce a concession into a market outside of a lease up/construction incentive (first month free on a 13 month lease) and I have literally called competitors to curse them out for doing so. Once you introduce a concession, it's a race to the bottom and everyone loses. When adjusting rents, it's important too to go unit by unit. If your A3 unit is kind of ass and no one is leasing it, by all means, drop that by $25 or $50 a month. But then try to increase the rent of your best units alongside it so that your average rent doesn't fall accordingly. It's all kind of a game.
So, when your property manager reports that they they "saw only 3 pieces of traffic this week with 2 applications, 1 net lease, and 2 notices to vacate," you need to ask questions about those numbers. First off: why are you only getting minimal traffic? Second, 2 notices to vacate is missing context, because 2 notices and 3 renewals doesn't matter, but 2 notices and 0 renewals might. 1 net lease isn't going to get you there if you need call it 5 renewals or new leases per week, so why was there only 1 net lease? Was it a holiday week? Is the property dirty? Are you not putting enough money into Google paid search?
Then when it comes to property financials, do you have any broker friends? A lot of multi financials is knowing what numbers "should be," as in what is market standard on things like turns, utilities, etc. but since you obviously don't know what things should be yet, you need to find out somehow. A good broker should be able to tell you what they're seeing in the market, and then it's just a matter of comparing that to your T12s and seeing where you are off.
And bigger picture, go to the property. Walk around, not with your property manager in your ear, but like it's your personal home. What do you notice? Is there trash lying around? Do the gates not close correctly? Is the paint peeling? Are there stains on the concrete? Are half of the landscaping plants dead? If you wouldn't live there, your you wouldn't let your daughter live there—even if you're a millionaire and this is a low income property or something—what would you fix to change that? Guarantee your tenants and prospects feel the same.
This ended a bit rambly, so feel free to ask any questions. Lots of good multi guys on this forum.
So one thing to keep in mind is occupancy is king. nothing else matters if that is doing poorly.
Loss/Gain to Lease is a made up number that basically is a grade of your ability to guess what the "true" market rent is. The company sets market rent, either by doing it themselves or some kind of revenue service. Always remember, it's a 0 entry. It doesn't affect total revenue.
From your examples, a gain to lease at 80% occupancy would only happen if you have a super sharp drop (probably somewhere in the span of 10% in two months) in occupancy and you're having to reduce market rents. The people still there with the higher rents would cause the gain. A 95% occupancy with large loss to lease isn't inherently bad, it just means what your system has as market rents clearly aren't the true market rent.
For financials, stare at the T12. That will give you the best story of what's going on. Look for weird gaps or sudden number changes. Then look at the budget variance report to see what the manager thinks is going on (they tell on themselves constantly).
I'll differ somewhat on one point here. GTL/LTL can be very useful, though if you aren't at least in the range of what your apartments actually lease for it won't be. What it really is is a projection of where your rents are going to go in the next 12 months. If you have a large LTL (again, assuming you're able to rent at those rates) then you should expect your Income to rise over time and you care less about renewals since if they give notice for an increase you can lease it for a higher rate. If you have a GTL (see: Phoenix, Austin, etc.) then you need to fight like hell to renew everyone you can, or you'll face turn costs and likely even lower rent than if you'd given a concession/lowered the rent for the in place tenant.
I don't disagree if you're using a revenue service but so many places game market rent (to the point it's basically lying to themselves) and will give two months free before even they even consider reducing rent that putting much thought into LGTL is rarely useful.
If your occupancy is over 95% your rents aren't high enough and vice versa. All you need to know.
I would at least give him the 4 Ps to check (people, product, price, promotion, mostly in that order), but you're not wrong, if you're above 95%, push, if you're below, figure out what's wrong (could be price, might be something else).
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