There’s a shift taking place in the multifamily market, a change in the dynamics between ownership and management. The shift was uncovered as a part of the Washington, DC-based National Multi Housing Council’s 18th annual ranking of the top 100 owners and managers. The shift comes in concentration, NMHC president Douglas Bibby explained to in a recent interview. The share of apartments managed by the top 50 management firms rose by 8.3% last year (a record, says NMHC, that brings the total managed to 2.6 million units–14.7% of the national rental inventory). In contrast, ownership growth rates among the top 50 rose by a relatively meager 0.8%, to nearly 2.7 million units (15.2% of the total). Growth is hard to sustain, Bibby implies, when so many owners are becoming net sellers, with the likes of Equity Residential dropping 30,000 units and Aimco shedding 22,000. In the course of the discussion, Bibby addressed why the shift took place and what it portends. In terms of an overview, what do you make of the statistics?

Bibby: In terms of the growing concentration of management of apartment communities, the business model of third-party management increasingly is going to require economies of scale. On the ownership side, we saw an incredible appetite for apartment communities in 2005 and 2006, which presented an almost unprecedented opportunity for attractive sales. What are the drivers?

Bibby: On the ownership side we’ve found prices commanded by apartment communities that people never thought they would see in their lifetimes. This is coincident with some owners decreasing their exposure in certain markets across the United States.

On the management side, there are increasing costs of doing business, such as utility and insurance costs, so third-party management companies are being squeezed because the owners don’t want to pay big fees. There are some who believe that the only way to make this a viable business over the long term is to be bigger and more efficient, to outsource where you can and not imbed certain costs in your structure. How much overlap is there in management and ownership?

Bibby: There is overlap there, but the same dynamic and divergent perspectives exist. For example, Trammell Crow allowed its top management team on the property side to buy the operation out, forming Riverstone Residential [the buy-out of Trammell Crow Residential Services came in January 2006--ed]. It would appear that the third-party management side was not of long-term attraction to Trammell Crow, but the Riverstone folks were very confident that they could grow this business profitably. So what are the implications? In other words, at the end of the day, so what?

Bibby: Well put. The housing market, and as a subset the multifamily industry itself, goes through cycles. We had serious overbuilding in the late ’80s, but when the Tax Reform Act halted that, you had very low starts for a number of years. We’ve also seen a slowdown of starts over the past few years because of Condo Mania. So you have these fits ands starts, and we adapt and adjust. I would argue that on the management side of the business, the need for size and the economies of scale is not going to go away. That’s a trend you need to keep an eye on.

Also we have an incredibly diffused ownership structure in multifamily. Apartments are less than 50% of the rental units on the market. The NMHC top 50 represents anywhere from 14% to 16% of the total. That’s 85% out there owned by others–from investors to mom-and-pops. So any trends you want to ascribe to it are going to be problematic. It seems that there’s an inherent danger in fewer companies managing more units. Don’t you fear depersonalization or a loss of service?

Bibby: I don’t think the apartment community will suffer, if a third-party management company is growing in its ability to service its clients. You have the capacity to train your work force, bring more sophisticated software and technology services to the equation, to data-mine and do things to truly enhance customer service. So the opposite is true. A third-party management firm struggling to make a profit simply can’t invest in technology or staff training or extra service. They can’t afford it. We’re hearing about a shift in the public/private dynamic, maybe a slight softening of the investment market. How will those possibilities impact the findings?

Bibby: We’ve been through a very powerful investment cycle, which is probably as unsustainable as the housing bubble was on the single-family side. Certainly real estate has benefited from the vagaries of the stock market, and while that performance is still spotty, we had a good run for the past six years, considering the expansion in the economy. But if we run out of steam there, hard assets won’t suffer. What drew people to real estate was the attraction of a hard asset. We saw some rents catch up in 2005 and 2006, and in some cases they’re just getting back to where they were in 2000. After all, you can’t go to your proformas and plug in 10% rent increases every year. As a result of the larger trends, do you expect the shifts you’ve tracked this year to reverse themselves?

Bibby: We’ll probably continue to see a concentration in management. If you get a slowdown in the capital flows coming into apartments–and given the fact that people placed bets on condos that are now reverting back to apartments–you will see a net increase in ownership. Portfolios won’t be so quick to come on the market as people look to apartments for the long-term returns and lower risk versus other sectors. So yes, it will probably flip back.

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