Larger managers are more equipped to provide centralization to community owners, but the industry trend toward it may be inevitable.
For some years, centralization has been the most talked-about trend in multifamily property management. Centralization entails moving work previously done at properties to more centralized, specialized shared services, where they can be performed more efficiently.
Early progress came from the public REITs, who began to share the results of their centralization initiatives a few years ago and have been reporting financial benefits ever since. The success of these companies has dominated the industry dialogue with conference sessions ever since, demonstrating that this is a bandwagon onto which operators seem keen to jump.
But if we scratch the surface, we see that the trend exposes important differences in how companies operate multifamily real estate. Centralization is easier for companies with properties close together, making it easier to share team members between nearby communities. It is also easier for companies with decision-making control over their operating environments. That largely explains why REITs have been at the vanguard of this trend.
However, few portfolios share these characteristics. One of the most under-reported multifamily trends of the last decade or so is the growth of third-party management. Comparing the most recent National Multifamily Housing Council (NMHC) Top 50 list of owners and operators to the 2013 list, the average ownership portfolio is almost 15% smaller, while managed portfolios have grown by an average of nearly 80%.
That is a huge change in how the industry operates: Today, most properties are third-party managed, and that majority is getting bigger each year. That matters for centralization because decision-making authority determines how easy or hard it is to change the operating model.
A 20for20 study conducted with 14 leading third-party managers and their asset managers sheds some light on this trend. This article provides a snapshot of current progress toward centralization among operators in the industry.
Characterizing Progress
Establishing a useful baseline for centralization is hard because the term means different things to different organizations. In-depth interviews with 14 leading third-party managers revealed two accomplishments that define real progress toward centralization.
First, the company must have established a shared service environment that performs, on behalf of multiple clients, work previously done at the property. Second, the company must be charging its clients directly for the service instead of charging back the costs of the property-based associates to ownership.
The second point is critical: One of the biggest obstacles for third-party managers wishing to centralize is that property management agreements (PMAs) assign individual staff members to specific properties. That enforces a decentralized operating model that can only be changed if both owner and operator agree to change the PMA.
For multifamily properties with separate owners and operators (i.e., most of them), centralization entails a renegotiation of commercial terms. That is not the case for the owners-operators that dominate the current conversation about centralization. It represents a high bar for fee managers to clear, and it changes the range of options for centralizing operations.
The good news is that some operators are making tangible progress, as the chart above demonstrates. Plotting respondents based on the rollout of shared services and the rollout of a new commercial model makes the levels of progress clearer.
Each dot in the chart represents one third-party manager. The ones at the bottom are not currently treating centralization as a priority. Some are doing limited work within the confines of a single client with no plans to extend the service more broadly. Some were not working on centralization at all.
Interestingly, this segment includes some of the largest operators in the industry. It would contain several more dots if the companies who declined to participate in the survey were also included. (This is based on follow-up interviews with asset managers whose companies own assets managed by those operators.)
In the middle of the chart, nearly half of the companies are at some stage of working on or introducing centralized services. “Working on it” usually entails an extended pilot with a set of properties but no change to the commercial model at the time of the interviews. “Early Market Introduction” means the operator is running a shared service environment for multiple owners and charging them directly under revised PMAs. But these companies have yet to roll out the services more broadly to their ownership groups.
The five companies in the top right corner view centralized services as “Part of our operating model.” In addition to having multiple clients paying directly for centralized services, these operators offer their centralized program to every existing client and every bid for a new deal. The extent of centralization, then, is constrained only by the ownership’s acceptance of the program.
The Ownership Perspective
Owners decide whether or not a property changes its operating model. That makes centralization a different proposition for third-party management relative to owners-operators.
An owner-operator like a REIT may have the flexibility to regionalize operations across all its properties in a given submarket. For third-party managers, each region typically represents multiple owners with different perspectives and priorities. With multiple decision makers, decisions are seldom regional in scope. The negotiation between third-party managers and owners tends to focus on one property at a time.
This dynamic became clear when—as part of this research—the findings of the third-party manager interviews were shared with a group of 10 asset managers from some of the largest institutional owners. While the flexibility and efficiency of the centralized model are, of course, enticing, their perspectives were generally cautious.
On paper, replacing property associates with centralized services means lower costs and improved NOI. In reality, the NOI benefits only accrue if the new model comes at no cost to customer experience, leasing and, hence, revenue. Owners, therefore, look for evidence that the centralized model performs at least as well as current staffing models. Centralization can be seen as a “chicken or egg” dilemma for those considering adopting it.
The “one property at a time” dynamic is critical here. When an operator proposes centralizing a role, the owner’s decision usually concerns replacing 100% of a property associate with central support. That is different from reallocating the duties of team members between neighboring properties, as REITs and others have done.
In this scenario, it is important to consider the impact of losing one team member on the remaining property associates. Andrew Livingstone, COO of Greystar, says: “One of the complexities of integrating centralized admin services is that even if the central team does all of the work of one site team member, the remaining site team members feel they have extra work to do. That has been an important consideration as we have supported teams through the transition to the new model.”
Coverage vs. Task Execution
That hints at an important consideration: Front-office team members need to perform specific tasks while also covering the front office. Coverage of the front office remains a source of hesitancy for ownership groups considering adopting the new model. “There is a natural risk aversion among institutional owners, and many remain sensitive to the risk of reducing office hours. The concern is that a property could lose leads when the office is closed,” says Livingstone.
Office opening hours were a common theme throughout several of the interviews, suggesting that they may be a “sacred cow” for property owners. Operators seem increasingly keen to challenge conventional wisdom. Cindy Clare, COO of Bell Partners, notes, “We have found through our analysis that it really isn’t necessary to operate seven days a week. The data supports the adjustment of office hours.”
Mark-Taylor has made significant progress in integrating centralized operations of its Class A portfolio composed of 80% third-party properties across Arizona and Nevada. CEO John Carlson, says: “We overcame resistance to modified opening hours by introducing appointment-based services. This adjustment has improved customer satisfaction scores and given onsite teams greater control over their day-to-day responsibilities. With better-managed schedules, they feel less overwhelmed, which translates to a better overall experience for both staff and residents.”
In the case of Greystar, this hesitancy has meant that the earliest adopters of centralized services tended to be larger properties. As Livingstone explains, “Larger properties were well-represented among our earliest adopters. It is easier to replace one role with centralized resources if it entails going from four to three front office team members than from three to two.”
Evolution, Not Revolution
This research suggests an industry in a rapid learning stage about which centralization models work best. Some companies are moving faster than others toward a more centralized future. Those implementing new models are learning through experience what combinations of centralized services, staffing changes and property-level execution will deliver the promised benefits without compromising asset value.
That learning process explains why many asset managers interviewed are proceeding cautiously. They are attuned to the relationship between staffing, customer experience and, ultimately, asset performance. That said, most see centralization as inevitable, given the sharp escalation of multiple operating costs in property management. Efficiencies must come from somewhere.
As operators innovate, they find new and better solutions to operating challenges. Clare notes, “When we began piloting centralization, we focused on the Assistant Property Manager (APM) work. However, we’ve found that it’s not always the APM role that gets centralized. Refinements to team structure are highly contextual to individual properties. For example, for a property with a sister community nearby, the right model may be a shared community manager role, with the remaining workload redistributed between central support and a redefined APM role.”
We are in the early innings of understanding how the trend toward centralization will affect fundamentals like career planning. Operators must optimize staffing while also ensuring that associates have the opportunity to advance in property management. We also know relatively little about how operators’ centralized capabilities affect competitive dynamics in the contest for third-party management contracts, given the relatively slow recent pace of property transactions. But the toothpaste is out of the tube. Centralization is harder for third-party managers than it is for owners-operators, but a growing number of companies are doing it anyway.
Dom Beveridge is Principal at 20for20.