The relationship between multifamily investor and manager is changing. Whereas in years past, investors were satisfied with quarterly or even annual updates on the performance of their apartment assets, the remarkable growth in volume and access to industry information in recent years has made investors crave that information on a near daily basis. At the same time, the pain of the Great Recession is still fresh and investors are hyper vigilant in the management of their assets and have ever higher expectations of transparency and performance.
During a session at the 2015 NMHC OPTECH Conference & Exposition, David Ohlrich, SVP with Federal Capital Partners, said keeping up with the investor requests for data is a challenge-one that would be exponentially more difficult if management companies had not evolved and invested in more sophisticated data and reporting systems.
“If I was doing this 10 years ago, my life would be very difficult,” Ohlrich said. “Everyone was using different systems and metrics. You could go back and do your financial reviews, but when I would have to roll that info up and provide it to the investor, that was a bear. ... [Now we have] an internal system that pulls in the data from all our managers. That allows us to do modeling, reporting, analysis-and that makes it very easy for me to work with a lot of managers. ... [And] as we go through this process, we’re learning more about what our managers do. Virtually every program, from revenue management to accounting, are pulling together BI [business intelligence] tools to go along with their program.”
But the ability to dial in on the metrics has also upped investors’ performance expectations. “Success is NOI, cash flow,” said Ohlrich. “That’s the driver for everything.”
So, similar to vendor reviews, many institutional investors are setting up similar structures for their property manager partners so that the managers have accountability. “We sit down on an annual basis [with our property managers] and review the results. We refer to it as a report card and use it as a way to interact with our managers-and also as a way to find out where we cause them pain and undue harassment. We do benchmark, but we don’t make it a competitive thing. Rather, it’s really to establish a set of best practices.”
For some institutional investors, being one step removed from where the rubber meets the road has sparked debate over the value of self-managing assets. While the idea of having more control over an asset is appealing, most see having a third-party manager both gives them necessary local expertise and flexibility throughout the market cycles. Using a property manager can allow investors to scale their investments up or down efficiently.
“Private equity has a life to their funds,” explained David Miskovich, COO of Ross Companies. “For example, maybe a firm has 14,000 units today; it could be 5,000 tomorrow. When it’s time to sell, it’s time to sell. They don’t want to have the infrastructure.”
Given how close the relationship between investor and property manager has grown, many institutional investors are doing coinvestment deals with property management firms. However, there can be difficulties in putting together coinvestment deals because the investment periods can differ for investors versus property managers. However, the way to an institutional investor’s heart is through deals, said executives, so they are willing to give preferential treatment to managers to also bring them deals.
Regardless, the relationship is changing, as investment returns and property performance are becoming more aligned and firms on both sides of the equation are being held more accountable. The industry can expect to see more of these relationships as the multifamily business continues to attract investor attention and property management companies continue to grow in sophistication and capability. Currently, just 2.9 million units are owned by institutional investors, suggesting there’s a lot more investment opportunity. At the same time, the top management companies are growing, with NMHC 50 data showing the top management companies managing 150,000 more units than controlled by the top owners.