Welcome back and happy Tuesday! I hope your week is off to a good start. We have our leadership meetings on Monday afternoon and I usually walk away motivated and encouraged. Since we’re all remote, seeing everyone and getting caught up and prepped for the week ahead is a great way to start the week. I used to think I had to have all the answers, but as we’ve grown, I am really enjoying the energy that comes from leading a group of leaders. We’ve certainly got our work cut out for us, but it’s achievable and exciting. Yesterday we were chipping away at making our payables process better. Sometimes it gets a little tense but a respectful legitimate frustration communicated is a heck of a lot better than the alternative – the slow death of mediocrity.
I also had a chance to spend some time playing “chess” with my four-year-old son. I say “chess” in quotation marks because while my son is pretty smart, he’s not some chess protégé. After begging me on several occasions to play “that game” – he didn’t even know the name but thought all the pieces looked really cool – I relented and we had a great time. After 5 minutes it was on to the next thing. He just wanted to move pieces around on the board. But he loved it. It reminded me of the importance of slowing down and making the most important things in his life the most important things in my life. And I did teach him where all the pieces go and what each of them is called.
In our business, I try to exemplify and encourage the same mentality in our leaders – of slowing down to help others figure things out. It can be easy to gloss over things or come to quick conclusions based on assumptions. Taking a moment to really stop and ask questions, solve a small problem, or push through a mental hurdle is very important as part of being a good leader. We use a process called IDS – Identify, Discuss, and Solve! Most meetings can tend to be a huge discussion about the issue with a little identification and not much solving. We’re working to spend most of our time solving the issue. One recent issue we had was our visibility into our property marketing plan and our final solution (after a few interim solutions didn’t work) was to build out a new marketing plan.
Operational Expense Win!
A few months back we brought on a super smart marketing guru to help us improve our capital outreach. As we were in the middle of doing that, we decided it was time to replace our existing property marketing process. I went to him and asked if he wanted to help – not knowing exactly how much work it would take. He was excited about the challenge and took on the task of creating 24 new property websites in 2 weeks! Folks I’ve never seen someone crank out that many websites in such a small amount of time. I’m still amazed that he pulled it off. Now, I know he had some help, but still, coordinating all of that is super impressive.
We’re still working on getting all of the back-end “stuff” tweaked the way we want, but I have no doubt we’ll be cranking out some really great leasing traffic here shortly. Our traffic prior to the transition was pretty good but we lacked in many other areas and didn’t have the desired control over our marketing spend to pinpoint areas that needed special attention. I wanted to be able to shift marketing dollars on short notice to supplement a property that had a large vacancy due to non-renewals or evictions. Or focus on a property that we were re-profiling and needed help to pull in the demographic that could afford the new rents. We also wanted the ability to hold our marketing team accountable for the content – pictures getting updated, websites being accurate, etc. There were all kinds of details that had previously been overlooked and were difficult to get fixed. We now have these abilities.
And last but not least, in our current environment where operations are the key to survival, we were able to lower our overall monthly marketing spend from $65k/mo to $45k/mo. That’s huge. A quarter million dollars in savings with better control over strategic deployment. Right now getting new quality residents, retaining existing quality residents, and improving cash flow are all critical success factors in our rental environment today. Competition is stronger as the economy gets weaker. We need to be able to continue to outperform our competition when it comes to bringing in quality leads – while maintaining an industry-leading ROI for those leads.
Economic Occupancy
Another important measure of overall ROI that is super important in multifamily real estate is economic occupancy. In simple terms, economic occupancy measures the amount of rent collected versus how much could have been collected had everything gone perfectly – i.e. 100% occupancy, no concessions, and no delinquency. There is always some loss factor in this measure because it’s nearly impossible to be 100% occupied and have 100% of your residents paying rent every single month.
Anything above 90% economic occupancy is considered the industry standard. Typically you want to be at 2% or less on delinquency and 5% or less on vacancy – putting a good economic occupancy number at around 93%. Anything below 90% economic occupancy and you would know there was a management challenge. Anything above 96% and you could have a rockstar team on your hands! In our value-add space, we allow for 80-85% economic occupancy during the first year of ownership because we know the property will take time to re-stabilize as we’re executing our business plan. Similarly, in year 2 we assume a sub-90% economic occupancy as we’re still working through the value add components and putting the right team in place.
Conservative underwriting is a key element of our success and all of our deals are stress tested to 75% economic occupancy. While that economic occupancy doesn’t allow for distributions, it does protect our capital – rule #1.
Market Update
Bank concerns seem to have faded which has brought the capital markets some needed stability. If liquidity dries up, it could precipitate another 2008 scenario so we don’t want to see that. Many members of the Fed are actively working to debunk the idea that we’ll have any rate cuts this year – and some have hinted that we could still see another hike. Obviously, the data will provide a clearer picture for us, and them, on what to expect next. As we’ve seen, though, inflation continues to decline – slowly but surely.
CoStar research showed 34,000 net move-ins for last month – a very strong number showing the continued resiliency of the economy and the renter market. Some of that is probably driven by the strong job and wage growth – which bodes well for the industry but bad for potential rate reductions at the Fed level.
On a micro level, I’m seeing a different group of investors lean into this current environment. Smaller, less sophisticated investors are generally out. Larger, more sophisticated investors are becoming more bullish on the overall picture. And more international capital is also looking for a home in US real estate. There is still a growing pot of opportunistic capital sitting on the sidelines waiting for GFC 2.0 but some of that capital is getting impatient with the lack of progress.
In general, no one has blinked at this point in the game. A few semi-motivated sellers and a little give in pricing, but it’s nothing akin to a massive market correction. At the end of the day, this could be the new normal – where pricing adjusts very slowly and eventually stabilizes as the economy comes back. Markets and capital hate waiting and hate uncertainty so if it does continue like this I expect to see much hand-wringing while the smart long-term capital continues to pick up deals.
St Pete Portfolio Fully Raised!
I’m headed up to St Pete today to meet with a couple of folks as we prepare for the groundbreaking on June 6 and soon thereafter construction starting. Our demolition crew is working to prep the land by removing the existing structures. And on the capital side of things, we’re just about fully raised for this deal so things are coming along nicely.
Where In The World Is Robert?
Just in case you missed it last week – I’ve got a few trips planned in June and would love to connect if you’re in these areas. I’ll also be doing site visits throughout the Southeast so feel free to join me walking units.
June 1-2, Atlanta, GA
IMN Southeast Middle Market Conference
- This is my favorite conference for operators, brokers, lenders, and anyone involved in the middle market (small to mid-sized companies) multifamily space.
June 7-9, Atlanta, GA
NAA Apartmentalize
- The National Apartment Association has a once/year event called Apartmentalize where you get access to probably the largest group of providers and operators in the multifamily space. Everything you could want related to property management – all in one place!
June 12-14, Charlotte, NC
MFINCON (Multifamily Investor Nation Conference)
- This is probably the largest meeting in the country of passive and active investors all focused on syndication. I’ll be speaking at MFINCON along with many of my good friends and colleagues in the business.
That’s all for now! Thanks for reading and have a great week!