CallSource^® Aim Higher

Decreasing Operating Costs

by Dee Strong is the President and founder of Multifamily Strategic Advisors, September 9 2008

Dee Strong is the President and founder of Multifamily Strategic Advisors, a national consulting firm specializing in increasing return on investment for multifamily assets.

Dee has successfully assisted numerous multifamily real estate companies with new construction lease-ups, revenue enhancement, expense control, operational management and rapid turn-around of underperforming assets.

Prior to founding the company, Dee served for nearly 20 years in senior level positions for respected multifamily organizations throughout the United States. During her tenure, she was directly responsible for the management and operations of assets valued at more than $3 billion.
Decreasing Operating Costs and Increasing Revenue

Q: According to a current Real Capital Analytics report, sales volume of apartment communities is down 30%. What should property owners be doing to maximize the value of their assets?
A: To begin with, it's important to understand the prevailing economic climate. Today, it's much more difficult to obtain financing. Lending institutions and equity sources are really scrutinizing deals more closely now. Previously, loans were being underwritten assuming that the rents were going to grow - they're just not doing this anymore.

In order to obtain equity, buyers have to demonstrate that their financing is strong with today's numbers and not expected numbers. They need to get back to the basics and focus on the fundamentals of operations - that's what drives value.

Q: What can property managers and owners do to decrease their costs?
A: Though some owners believe that you can't control operating expenses - they think they control you - now is the perfect time to challenge a community's operating expenses to uncover hidden savings.

There are many ways property managers and owners can reduce expenses - and do so without affecting overall performance of the asset - by taking control of operating expenses. The simple process of bidding all projects, coupled with the art of negotiation, can produce a dramatic reduction in expenses.

Q: What do you recommend regarding the bidding process?
A: The best way to know if you are effectively managing expenses is to bid all outsourced work, whether it's a large capital improvement project or a more common expense such as carpet replacement. For capital projects, procure a minimum of three bids and ensure a detailed
scope of work is completed so that all bids are "apples to apples". Competitive bidding prompts vendors to "sharpen their pencil" and can provide insight into what charges are buried in their pricing.

For smaller, continuous projects such as carpet replacement, a minimum of three vendors should be contacted during the budgeting process. Total cost for carpet, installation and pad replacement can vary by as much as $3/yard by vendor. Through bidding, if a 200 unit property with a 65% turnover can reduce their cost by $3/yard, the annual savings could be as much as $27,000.

Q: Can evaluation of invoices help reduce costs?
A: Absolutely. It's important to scrutinize all expenses - you can gain insight into areas where you may be able to cut costs. Ensure that each component of every budgeted line item is analyzed for cost effectiveness. Analyze every invoice paid and ask: Can the property save money by doing this another way?; Are there any charges on the invoice that weren't negotiated or agreed to? Have the prices been negotiated? Is there anything on this invoice that the maintenance staff could perform in-house?

Q: How can utility expenses can be reduced?
A: Utility expenses can be reduced substantially by offloading a portion of the expense to the residents. To compensate for rising water and sewer costs, many owners and managers are turning to sub-metering and ratio utility billing systems (RUBS). If you are not using some
sort of system to reduce utility costs (water, trash and sewer), the potential annual savings in converting to one of these systems is substantial.

Q: How important is the Internet in marketing to the multifamily industry?
A: What I've observed quite frequently in my business is that property management companies really need to focus on their Internet advertising and how much of it is driving traffic. If they're not really focused on this, they're going to be left in the dust -- they won't be able to keep up with the big players

There's an excellent white paper published by MyNewPlace.com ("Multifamily Marketing in the Internet Age", December, 2007), that covers how consumers use the Internet and its implications for property management companies.

The industry data suggests that the Internet is the single greatest sources of leads and leases for leading multifamily owners and managers. The study found that of renters with access to the Internet, 64-72% started their search for an apartment online. If you're not riding the Internet wave, you will be left in the dust.

Q: What is your assessment of the industry's future?
Well, for the last seven years, we've added about 100,000 market rates units annually - this is 1 % of the national stock. Marcus & Millichap forecasts demand for 100,000 new units per year for the next 10 years - the demand will be greater than supply

I think the multifamily industry is in a great position right now, and for the next 5-10 years, barring a catastrophic event, I think we're primed for a great future.