Anyone work for a development/REPE shop that also has an in-house property management business? Is it a time and energy suck on the core business, or does it truly help provide recurring fee revenue to cover the peaks and troughs of the acquisition/development/disposition cycle? How many units do you need to operate before this becomes more economical than outsourcing the time/risk/frustrations to a Greystar for 2-3%?
Thanks for any insight.
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I work for a multi REPE with fully integrated vertical, all the way down to owning the landscaping company. Bottom line, it's very helpful. As an acq analyst I have full transparency into every part of our operating costs, and what we've historically been able to operate X vintage in Y market for. As for the AM guys, they can see through and thin the expenses and maximize what works to keep at or better than target (usually 10% better than a Greystar). Sure, you have to bump up the headcount a bit for the PM and they have to deal with all the property-level bs like repairs, complaints, and employee turnover, but it makes sense.
All this to say, it's not the 2-3% fee income we make that we do it for, or to flatten the ride of the market - it's a very real asset to our core line of business
Without giving away any personal details, can you say how far back your firm's properties' historical expenses go? My company is also vertically integrated with PM, but has only owned about 40 properties and many of them are in different markets and asset classes so the expenses aren't all that robust. Any advice on how to leverage what data we do have (especially for creating/reducing budgets for new properties)?
I use info from active funds to keep current, so the timeline is out to ~7rs. We also have ~3 properties per property class per market, so it's not necessarily an end-all-be-all for expense forecasting, nor do I use it to get just 1 number for, for example, advertising expense. It's more just keeping track of our P&L items, so that when digging through a seller's T12, it's easier to tell what line items can be cut and get a rough idea of where to land on expenses.
As far as budgeting, we loop in our market AM/PM people from right after the deal is awarded/under contract and they budget out each line item based on historicals, informed by property walks/physical DD.
All in all, whatever data you do have is useful as long as none of the properties in it are abnormal (badly built with uniquely high costs, bad tenant base, etc). We use it more to lead us to the right place but not give us the answer.
I work for a national MF developer with in-house property management. The PM arm of the company actually loses money (intentionally), and we fund the gap with our development and construction fees (also in-house GC). The idea is that, by spending a lot more money than most owners to make sure the tenant experience far exceeds our competitors, we outperform our submarkets on lease-up speed, occupancy and rents. We still have enough overall fee across our development, const. admin., and GC business to both subsidize the PM business as well as operate all of our platforms (dev, GC, etc). It's also not a huge gap, which makes it doable. As to why we intentionally do this:
The most important aspect for us is that we end up having the most valuable asset in our submarket when we take the asset to market. Then, because we're able to spend a lot on our PM operations (top PM talent/overhead overseeing various regions, national data tracking and trends, marketing/branding, research, etc) to drive deal performance, we're able to ensure we are creating extremely valuable assets which maximizes our sale price, and maximizes our promote in the end, which is where the organization really makes money.
We've been doing this across roughly ~10 project deliveries per year (typically ~200-350 units per project) over the last few years, and what we've seen to date is that, by the time these projects stabilize and sell, we see the positive results in the form of the higher promote.
This is likely a development-specific strategy. If you're a medium- or longer-term holder trying to grow your portfolio and you want to have an in-house PM arm that contributes to your overall income, this obviously doesn't work. But for developers who are shorter-term focused and trying to create valuable assets that command the largest purchase price possible (and juice the promote), perhaps this is something to look into.
Do you only merchant build?
Out of curiosity, is your firm charging market rate fees? Or are you charging under market fees? Is the loss for the PM company caused by hiring extra talent, such as research?
Besides PM fees, what other ancillary sources of income does the PM company have (or is it only the PM fee)? Do you get leasing commissions? At a certain scale which it seems like your firm has, I’ve always assumed after a certain point, everything is ‘gravy’ - of course as you grow you need to hire more, but one regional manager can oversee 10-20 buildings. So it does scale nicely. Just trying to understand what’s driving the losses and what sources Of income the firm has.
I used to work for a very large developer with in house property management.
It's not a profitable business unless you charge a lot of your overhead back to the property, and when you own the property and it comes out of pocket either way, it means you aren't making a lot of revenue on the back of property management.
However, it is extremely valuable for maintaining close contact with residents and their concerns, instead of only hearing about the heating(/pest/elevator/etc) problems they've been having when the article comes out in the local paper and blindsides you. For that reason alone it is worth the headache. And yeah, maybe you make a couple bucks on the side. Presumably when you reach a certain scale, you get discounted buying opportunities from supplies, which brings down opex, or you don't have to make a profit on every contract that you're not telling ownership about. So the benefit would seem to be, in my mind at least, that you can accurately budget down to the dollar and maybe scrape some opex savings here and there which makes you more competitive for future bids. And if the PM business doesn't make money... well, it doesn't lose it, either, so maybe it isn't supporting the firm through a down cycle but it may allow you to do 10% more deals or make 10% more on the ones you're doing, and that's obviously worth quite a bit.
Also, it seems to me that a lot of development/acquisitions shops end up doing a lot of the work property managers do, because you just cannot trust a third party PM to be as on the ball as an asset manager who reports directly to the developer. So for an owner of a dev firm, there is probably a fair bit of savings at the operating company level if you aren't doubling down on some of those functions. Like, take your 3 asset managers and have the property management company pay for them, instead of having them oversee a third party manager, and you've probably generated several hundred thousand dollars of savings right there.
Do you see firms able to pass asset manager and asset management analyst/associate salaries back to the property via property management costs to help recoup some overhead?
I see our third party managers do this all the freaking time. Or rather, they pass on-site staff back to property and then pay for the (horribly understaffed) management teams out of the fees. It's why our firm has such a robust AM team - because there really isn't anyone doing this for the property manager, which is nominally where those people should sit. The few AMs they do have are so overwhelmed that they can do little more than put out fires and help with creating budgets, when really they should be spending time digging into said budget and finding efficiencies.
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