Sagging Multifamily Market Sparks Renewed Push For Apartment Owners To Do More With Less
After a year of slow rent growth and high interest rates, apartment owners that have enjoyed years of profitability are seeking improved efficiency through the increased use of technology to centralize operations.
In an effort to keep costs under control, many landlords are looking to make their operations more efficient, hoping new technologies and processes can shave expenses enough to boost the bottom line, even in a tough market.
“If you had a problem property a year ago, you could just sell it,” said Lucas Haldeman, CEO and founder of SmartRent, a proptech firm whose access-control tech has helped accelerate centralization. “Now, I can’t sell it, so I have to manage it. The tenor of multifamily has absolutely shifted to expense control and ancillary revenue, two things we didn’t talk about when rents were skyrocketing.”
Centralization includes numerous stages: placing accountants and management in central offices, creating maintenance teams that work across different properties and using self-guided tours and centralized leasing teams to fill vacancies.
Technology needed to underpin centralization by improving property management, operations and maintenance has been in play for more than a decade. Both the technological solutions used in the geographically distributed single-family rental industry and the need for digital interactions during the pandemic helped speed up adoption.
But commercial real estate remains slower to adopt new technologies. As recently as 2021, per a CBRE report, 76% of property owners and investors used Excel spreadsheets as their primary analytical tool, and 69% said they were too reliant on the software.
Last year, with expansive growth in the multifamily sector and a tightening labor market for property managers, operators and owners were investing more in updated technology, according to Sunny Juneja, CEO of Canopy Analytics, a property reporting and team management software firm.
But as rent growth has cooled, the demand for higher-tech solutions has heated up. With owners seeking to combat shrinking revenues and rising expenses, industry analysts expect spending on technology will increase in the near future.
Operators are being “pushed into” centralizing their operations via technological tools since they are looking at their portfolios and seeing fewer drivers to improve returns, said Alexandra Nicoletti, a partner at VC firm Camber Creek.
Increased centralization has led to better efficiency and lower costs for many owners, but it’s undergirding increased institutional investment in smaller buildings, according to Haldeman. Larger buyers can now set their sights on smaller rental properties, since centralization of operations allows them to achieve efficiencies across their portfolio, regardless of the size of the individual apartments.
“You can’t do this without centralization,” Haldeman said. “That’s why you couldn’t do this 20 years ago.”
He’s also seeing buyers shed buildings and concentrate more on densification of their portfolios, using centralization to further drive down costs and increase net operating income. A Texas portfolio acquisition by UDR in September was brought on, in part, by the increased efficiencies centralization would bring to the new properties, according to UDR Senior Vice President of Operations Mike Lacy.
Nicoletti said eventually, big buyers will be able to factor in the cost savings of centralization when underwriting acquisitions.
Many larger owners have long invested in technology, including larger public REITs such as UDR and AvalonBay. UDR has plans to increase its number of unstaffed properties to 40, and it has seen significant savings in maintenance, repair, utility and re-leasing costs due to these investments. But, in a sign of just how challenging the operating environment has become, the REIT still saw a 6.8% increase in operating expenses last year.
Current market conditions have catalyzed more interest in operational technology, and new startups, such as Lessen Inc., are trying to sell centralized management and maintenance services to smaller landlords.
It has been hard for any owners that lack the centralized control and property density of REITs to fully realize the benefits of these tools. But now, according to Dom Beveridge, principal of multifamily consultant 20for20, more third-party managers are figuring out which aspects of operations they can make more efficient and are finding the software and systems to improve operations and cut costs. While adoption isn’t as robust as people expected — a recent 20for20 white paper on the topic found uptake lagging — many see vast potential.
“We’re still in the very early innings,” Nicoletti said. “There’s been a lot of focus on the larger players, but the real estate landscape is significantly broader than that.”
Firms like Funnel, a leasing platform that works with six of the 20 largest property management firms nationwide, and HappyCo, a maintenance platform that services about 3.5 million units, are aiming to centralize and automate amid the sector’s labor crunch. HappyCo CEO Jindou Lee said he is seeing more executive interest than ever in centralizing maintenance functions.
Many see artificial intelligence playing an increasingly large role in this sector, assisting with leasing and sales teams and helping streamline paperwork and mundane tasks, such as predicting when buildings need repairs, checking documentation for fraud and managing work orders. The 20for20 report says AI leasing programs in particular have seen a “meteoric” rise. New platforms including ColleenAI, which automates rent collection, and EliseAI, a property management platform, aim to further streamline apartment operations.
“I don’t see AI replacing humans in these transactions,” Lee said. “Instead of one person managing 100 units, this one person, with AI and technology, can manage 300 or 400. That’s where it’s going to really help.”
Benefits of scale tend to accrue to larger property owners. Larger players can see an almost immediate benefit with shrinking their leasing and management teams. Smaller landlords, who see limited tenant turnover and more sporadic maintenance needs, don’t always rapidly reap benefits, said Allia Mohamed, founder of Openigloo, a platform that, in part, is trying to help smaller landlords rent their units.
“One of the challenges for any proptech sort of channel is trying to pitch something that's not going to add costs to small landlords,” Mohamed said.
Going forward, adoption of AI will only exacerbate the technological gaps between larger and smaller players in multifamily, Mohamed said. Larger owners will have more data, helping them further streamline operations (and as the RealPage scandal over algorithmic rent-setting demonstrates, realize more upside during periods of increasing rent). Beveridge said he believes in 2024, there will be lots more evolution of AI, as well as better applications of this technology.
But while that focus would likely drive significantly more technology investment in a different economy, there are larger issues getting more immediate focus. A recent Newmark analysis found nearly $200B in troubled multifamily loans maturing between now and 2025. The worry facing owners isn’t just that revenues are dropping so they need to tighten belts and get more efficient, it’s more a sense of “existential dread” in their portfolios, Juneja said.
In this environment, new tech has to clear a high bar to be considered worth it.
“We’re getting a lot of inbound calls, but I’m disqualifying a lot because even if, say, technology can increase NOI by 5%, which is a tremendous change, that’s not enough upside,” he said.
Juneja has also tracked significant attrition within the already thinned ranks of property management, maintenance and leasing professionals, with the cost of labor rising 10% to 15% due to large numbers of employees quitting in recent months and the surging cost of hiring temp labor to cover open positions.
Even as owners continue to invest in better technology to run more efficiently and help remaining staff perform, Juneja has seen challenges keeping roles filled. Operators like to talk about the turnover costs of rooms, but costs are equally high for staff.
“Even if you're doing a great job on leasing, and you're dropping your rates, you're still feeling a lot of cost inflation around labor,” he said. “The cost of turning apartments is going up because of rising costs and staffing challenges.”