Economy's Uneven Recovery Keeps Pressure on Site Managers
Some say the economy is on a healthy rebound. Others say they see a gradual recovery, but we have a long way to go. Still others say, “What recovery?”
The Insider spoke with three site management executives to learn their perspectives on what the country's economy has meant to their business operations and how they're coping. We last spoke with them two years ago—we reconnected to find out what has changed for them: what has gotten worse, what has improved, and what has remained the same in their respective markets. We also wanted to get updates on some key issues of concern to them at that time.
The three executives are:
Jan Brandin, Chief Operating Officer of First Realty Management Corp., in Boston, Mass.
W. Reid Howe, CPM, Vice President of Crossgates Management, Inc., in McMurray, Pa.
Wende J. King, President of Royal Property Management in San Diego, Calif.
Here are their perspectives on the current state of economic affairs in their respective parts of the country.
A Look at New England
First Realty Management Corporation is based in Massachusetts. The firm manages affordable housing sites with approximately 6,300 units in Massachusetts, Rhode Island, and New Hampshire.
INSIDER: The economy's impact depends on the type of sites in a firm's portfolio—the more subsidized the sites are, the less severe the problems. For instance, two years ago you said you had very few vacancies in your Section 8 units. Is that still the case?
BRANDIN: Yes. Most of our Section 8 waitlists are closed, but we reopen each list periodically when we estimate we have fewer than a year's worth of applicants on file. When a Section 8 waitlist is reopened, we are flooded with applications within the first few days, at which point we must close it again.
INSIDER: Two years ago, you reported that background screenings are costing more, and more people are not passing credit checks—thus not qualifying to move in. Are you still seeing these things?
BRANDIN: Depending on the city/state market location, we are currently denying roughly 12 to 20 applications for each one we accept, based not only on credit scores but also background checks. The ratio is slightly worse than it was two years ago. This is despite the fact that we have become much more flexible about adjusting the credit score requirements to reflect current conditions.
The eligibility window is so narrow that we even reach out to work proactively with applicants who would have qualified, except for their credit scores. We help them implement credit repair strategies they can use to raise their scores, reapply, and meet the requirement. It's a dynamic process of balancing the profile of our existing applicant pool with credit requirements and consistently evaluating how even minute adjustments affect rent collections, cash flow, legal costs, or other financial and operating issues that could be more detrimental than a vacancy loss. In other words, to keep the ratio (and occupancy) more stable, we have had to become more flexible and analytical than ever before.
Unfortunately, we can't change history. We are seeing an increasing number of applicants who have evictions, repossessions, convictions, or other incidents in their pasts that continue to haunt their futures by making them ineligible for assisted housing. The fact that background checks have become more accurate and comprehensive is a plus in terms of screening out high-risk applicants, but it also makes the rental and occupancy process more onerous for managers and owners, as well as for those who sorely need affordable housing to avoid repeating the past.
INSIDER: You mentioned that people who had qualified for tax credit sites were losing their jobs and moving, so that your move-out ratios were going up. Please update that situation in your markets.
BRANDIN: The challenges of managing tax credit sites continue to evolve and become more demanding, which means we have to work harder and smarter to stay one step ahead. Our move-outs have continued to escalate, especially at tax credit sites, and at a much faster rate in Rhode Island than in Massachusetts, where the unemployment rate is lower.
When a job is lost, the resident tends to break the lease and move out as quickly as friends or family can make room, or to look for work or take a job out of state. Because there is no longer any such thing as a long waitlist for most of our tax credit sites, it can take 30 to 90 days to move in someone who meets the narrow income limits for that particular unit in addition to passing the various credit and background checks. When proper notice is given, there is usually time to complete this process quickly and successfully. But in a job loss situation, there is much more likely to be a sudden skip out, without notice or time for the staff to prepare.
Increasing turnover generates higher marketing and advertising costs that were not part of the original financial formula. Mounting expenses for additional credit and background reports, extra repainting and decorating to restore vacancies to move-in condition, and higher overtime or payroll costs to cover leasing activity needed at night or on weekends are also budget-busters. The impact is huge at these sites where operating deficits were not unusual, even before the downturn.
There is no single management solution to these issues. We have found that professional commitment, combined with innovative thinking, have helped us address these financial challenges.
INSIDER: Site owners are looking more at cutting costs as opposed to raising income, you reported two years ago. Still true?
BRANDIN: Definitely. At First Realty Management there is still a huge focus on reducing costs, particularly at tax credit sites, where we frequently have had to charge less than the authorized rent in order to meet stringent occupancy requirements and keep the units marketable. Tax credit units often are located in marginal neighborhoods and may be small in comparison to newer or larger affordable communities. For the non-Section 8 units, this means rents must be lower than in competing developments. We have seen a change for the better just recently in Rhode Island, but it may be short-lived due to escalating gasoline prices.
INSIDER: Tracking utility usage and costs to save and budget better was an important measure you talked about two years ago. How are those measures working for you, and are they still important in today's economy?
BRANDIN: Tracking utility costs is an essential part of our due diligence in managing every property. We are active members of various industry “aggregation of use” groups that go to auctions to purchase electricity at the lowest possible prices. We've reduced our natural gas costs by some 30 to 40 percent over the last two years at some properties by very aggressively re-bidding the contracts. We continue to be successful with cogeneration, geothermal, and other new technologies, and are always ready to pursue new initiatives for reducing costs while becoming more sensitive to environmental concerns at the same time.
At one tax credit site where water and sewer charges by the city were rising out of sight, we undertook a major capital project to reduce assessments. The city charges much higher rates to the big, industrial water consumers, and much lower rates to residential customers. Because the entire 200-unit garden-style community had only one water meter, it was charged the highest rate, which translated into approximately $265,000 a year just for water and sewer. This threatened to force the property over the brink and into foreclosure. By installing one meter per building, the site will be able to save some $75,000 per year in operating costs, with a payback of less than three years. This will go a long way toward stabilizing its finances, even with debt service and replenishing its reserves.
First Realty is also conscientious about looking at ways to improve efficiency. Last year at a high-rise in downtown Providence with an old and outdated oil heating system, we converted to a new and more efficient gas system that also was significantly more environmentally friendly. Considering what is happening to oil prices, this was an even better decision than the feasibility study anticipated in terms of future savings.
INSIDER: In your markets today, are you seeing more applicants for assisted housing?
BRANDIN: Certainly, the need for Section 8 housing has never been greater, and as mentioned earlier, any indication that Section 8 units may be available results in a torrent of applications.
When the economy appeared to be at its lowest point, demand for non-Section 8 moderate-income affordable units followed that downward trend portfolio-wide. However, just in the last few weeks there appears to be a very definite uptick in demand, particularly in our Rhode Island portfolio.
Despite higher gas prices and the lack of other positive economic indicators, prospects seem to be more confident and optimistic about the future, which for moderate-income people in their 20s translates into moving from the family home into an apartment. At Westfield Commons, a mixed-use residential/commercial historic mill rehab, the newly opened property was fully rented up in just a few weeks in February and March. At another portfolio of 193 tax credit units scattered in several different developments owned by a local community development corporation, 10 move-ins were scheduled on April 1 alone.
INSIDER: Please comment on any additional issues you're facing and solutions you're employing in an economy that's still in a recovery mode. For example, are your maintenance and repair costs going up or leveling off? Have you had to reduce staff, or reduce their benefits?
BRANDIN: We are bidding contracts more aggressively than ever before. Contractors who raise prices are asked to sharpen their pencils and be more competitive, sometimes even lowering their prices from prior years if they want to keep our business.
To save money on outside contracts, we are asking our in-house maintenance staff to do more. We are investing in training to help them learn new skills and apply newly acquired knowledge to completing more projects in-house.
While we have not found it necessary to reduce our workforce through layoffs, we now rethink each vacant position to determine whether we could save money by restructuring responsibility, or by sharing resources among sites to handle workloads more cost-effectively.
Gasoline and petroleum prices are already affecting maintenance and capital costs. A re-paving project that one site owner postponed from last summer was just re-bid. The oil content in asphalt raised the contract estimate by some 20 percent, and we will undoubtedly see other increases in costs of materials and transportation based on increases in oil.
The vagaries of how insurance companies calculate premiums can fluctuate wildly from year to year, but one way we have found to help control costs is by implementing loss-prevention programs portfolio-wide.
To help offset the rising cost of employee benefits, we have become much more proactive in offering employees a broader range of alternatives. The employee share of healthcare premiums has risen, but at the same time they now have more choices and opportunities to control their own costs by selecting the most appropriate plan for their personal needs. Two years ago we offered one PPO and one HMO plan. Now, we offer three different tiers just within the HMO, plus private, out-of-network coverage. Those who choose the most expensive medical facilities now pay more than those who choose hospitals and labs that charge lower rates for various key services. Our company now offers wellness and walking programs that also promote employee well-being, while reducing costs for those who participate.
Observations from the Mid-Atlantic
Crossgates Management is based in western Pennsylvania. The company manages affordable and subsidized sites with 4,000 units in Pennsylvania, Maryland, and West Virginia.
INSIDER: Two years ago, you talked about a marketing strategy that included offering services to attract applicants, such as on-site computer centers and free laundry service. You stated that these offerings might cost you, but they're necessary and have to be factored into your budget and planning. Do you still find that this is the case for you to attract applicants in your markets?
HOWE: It really depends upon the individual market. We operate in a three-state area, and even within an individual state some areas are strong while others remain weak. Overall, I think the affordable multifamily industry is seeing more applicants due to lingering economic conditions. However, applicants are worse off than before in terms of creditworthiness. We continue to try to be innovative to attract applicants.
INSIDER: You spoke of utilizing technology when possible and practical to help contain some operational costs. One example was staff travel. You talked about video conferencing with staff to save on travel expenses related to site visits. Is this still a business practice you use?
HOWE: Very much so. We are expanding the practice with more video conferencing per week between individual sites and our home office. We are also in the early stages of exploring Skype accounts for the properties—for use both corporately between site and district management and also with applicants—and the use of Facebook and other social media as a marketing tool.
INSIDER: Another operational expense where you saw technology helping to save on costs was mailing. You talked about the practice of scanning and emailing to save on traditional mailing costs, and scanning documents such as invoices and storing electronic copies to save on storage expenses. Are these still practices your company follows? Are there other measures you use now to control costs?
HOWE: We are still trying to use electronic vs. hard copy for all documents. Some state HUD offices are now accepting (and actually prefer) documentation via the Internet instead of the U.S. Mail, which is a step in the right direction.
INSIDER: Two years ago, you made an important point about reducing costs. You spoke about making a concerted effort to reduce corporate expenses overall because it makes good business sense, and not just because everything is more expensive. Is that still a philosophy you follow?
HOWE: Yes, that continues to be our philosophy. We have been able to reduce handling time for numerous tasks by converting things to PDF format and accepting electronic signatures for some documents.
INSIDER: In your markets today, are you seeing more applicants for assisted housing?
HOWE: As mentioned before, it really depends upon the individual market. There are locales where keeping an adequate waiting list of applicants is problematic, but in general applications are up across the board. It is as imperative to maintain good resident selection practices when applications increase as well as decrease.
INSIDER: Please comment on any additional issues you're facing and solutions you're employing in an economy that's still recovering. For example, are your maintenance and repair costs going up or leveling off? Have you had to reduce staff or their benefits?
HOWE: We have taken a close look at the level of staffing at our properties, and made cutbacks where warranted. Health insurance costs continue to be a huge problem everywhere, and we have unfortunately had to require increased contributions from employees toward their coverage premiums. We have also tweaked deductibles to keep annual increases as low as possible, and look closely at what level of site employee should remain eligible for coverage.
Maintenance and repair costs have flattened out, but utility costs are now becoming an issue, particularly where recent deregulation has resulted in higher rather than lower rates. Of particular concern are municipality-owned utilities such as water, sewer, and trash removal, since these are not regulated by public utility commissions. We have experienced incredible rate increases in some cities, as this is one way for them to increase revenues while claiming to hold the line on tax increases.
The View from the West Coast
Royal Property Management is based in San Diego, and was formerly known as Tarantino Property Management. The company manages more than 1,800 affordable housing units in southern California.
INSIDER: When we talked two years ago, you had recently moved your offices into larger space and expanded your staff. One reason for doing so, you explained, was that you were planning to diversify and venture into the commercial market. Were you able to move ahead with those plans?
KING: Not at that time, but we are still planning to move into the commercial market.
INSIDER: Two years ago, you reported that the economy in your market had driven up demand for affordable housing. In other words, the bad economy had been good for your company. What is the situation today?
KING: We have not had to do any marketing whatsoever. Rents are so unaffordable, there is a lot of unemployment, and people are losing their homes. I know there are high vacancy rates in some other areas—such as 7 percent and 9.6 percent—and sites are offering incentives for people to move in. But our vacancies are filling quickly.
INSIDER: Are there any areas of operations where you've especially felt the impact of the economic downturn since we talked two years ago?
KING: Maintenance and repairs. Our buildings are older, built in 1972, and we are having to do more default maintenance and repairs to elevators, roofs, deck enclosures, and other areas like that. We also have replaced appliances and carpets over the past few years. We have hundreds of thousands of dollars in repairs to deal with, some of which we are staging over the next five years. We have to make the repairs, and we have to be strategic in planning them.
Then you have the unexpected things, like the bedbug crisis. That's something people are dealing with all over the country.
INSIDER: How about your staff? Have there been any effects of the economy on staffing and/or benefits?
KING: We have been able to continue offering health and dental insurance and a pension plan. We are fortunate to have a lot of longevity with our staff and great retention. One thing we are doing is shifting staff among buildings as needed, which helps us keep people employed and busy.
INSIDER: Two years ago, you spoke about how a bad economy forces you to look at every aspect of doing business to see where you can be more efficient. Can you give an example of something you are doing differently now?
KING: One thing we are doing is renegotiating a lot of our contracts. Our trash contracts are a good example. There used to be a monopoly when it came to the trash service. Some may not realize there are now options for trash service.
We are actually finding that all of our contractors are becoming more competitive. I think the owners of these companies now realize they need to step up. In fact, some of them are now coming out of their offices and working in the field.
We really are taking a close look at all of our operations. It's something that should be done routinely and maybe now more than ever. We always need to stay within budget, so sometimes we have to be creative.
Outlook: Cautiously Optimistic
The site management business has not escaped the ebb and flow of the economy over the past few years. On the one hand, more people are turning to assisted housing, by necessity. In and of itself, that's a good thing for owners and management agents. But at the same time, every operational expense has climbed. So it is far from business as usual.
It may be more accurate to say that what these management executives are describing is the new business norm. In most, if not all, cases, the operational changes brought about by the belt-tightening have led to better business habits. Companies are going back to basics, examining their procedures and practices, and coming up with different and very effective strategies.
As Howe of Crossgates Management said, a lot of what he has been forced to do because of the economy “just makes good business sense.”
Jan Brandin: Chief Operating Officer, First Realty Management Corp., 151 Tremont St., Boston, MA 02111; (617) 423-7000.
Reid Howe: Vice President, Crossgates Management, Inc., 3555 Washington Rd., McMurray, PA 1517; (724) 941-9240; firstname.lastname@example.org.
Wende King: President, Royal Property Management, 17150 Via Del Camp, Ste. 307, San Diego, CA 92127; (858) 312-8170; email@example.com.