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Weekly UpdatesTHE CURRENT DOWNTURN HAS NOT TAKEN IREM CERTIFIED PROPERTY MANAGERS (CPMs) BY SURPRISE. THEY KNOW THAT REAL ESTATE DECLINES ARE CYCLICAL. WHILE ECONOMISTS PREDICT A CONTINUING ECONOMIC DOWNTURN, EXPERIENCED PROPERTY MANAGERS SEE PLENTY OF BUSINESS OPPORTUNITIES ON THE HORIZON.
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"We're entering a time when the need is going to be there for the top flight professional CPM," said Robert B. Toothaker, CPM, chairman, CB Richard Ellis, AMO [R]", in South Bend, Ind. "The smart lenders and owners are going to be looking for experienced CPMs who understand what they need to do to reposition a property or to save a property for the future."
J. Benjamin McGrew, CPM, president of MANAGEWEST, Inc. in Carmichael, Calif., agrees and understands the value of his IREM education and training to assist owners of troubled properties during these challenging times.
"We're seeing an unprecedented amount of properties hitting the market at the same time, McGrew said.
McGrew stressed that owners need to hire someone who has the credentials--a CPM or AMO designation--in order to turn many of the troubled properties around.
What makes a CPM or AMO firm stand out from the rest? Richard Muhlebach, CPM, and a real estate consultant in Woodinville, Wash., said that because CPMs are required to create a business plan--known as a management plan to those educated through IREM--in order to receive their CPM designation, they are trained to create these plans for every property they manage. This allows CPMs to show both their analytical and creative talents to owners when hired to manage a troubled property.
RECOGNIZING MURKY WATERS
For most in the real estate business, knowing some of the early signs of an economic shift is essential to taking the appropriate actions at the right time.
"When the real estate market is booming, people in the real estate industry think it will never end," Muhlebach, said. "When they are suffering, people think they will suffer a lot longer than they normally do. But when you're in real estate as a CPM, you know it's going to be a cycle. The challenge is in anticipating the cycle."
Experienced CPMs were alert to early indicators of the current decline. For McGrew, those indicators included calls from attorneys asking that his company serve as a receiver for troubled properties. As a result of this increased business, since February 2008, McGrew and his employees have worked six--day weeks, proving their worth as CPMs inside receivership and bankruptcy cases.
McGrew viewed the reduction of bank credit lines to basic consumers as a further indicator of difficult times ahead. Having worked as a real estate insolvency practitioner, he dusted off his law books so that he would be ready for new business that was sure to follow.
"This time around it's the housing market that's serving as the downturn's leading edge," McGrew said. "Retail follows rooftops, which means that if the housing industry stops, the unanchored strip centers are next, followed by office buildings and then other types of commercial industry."
Indicators vary with geography, often depending on the job market in a particular area. For example, for a period of time in advance of the current decline, the economy in eastern Michigan had been weak due to downturns in the auto industry exacerbated by the rise in gasoline prices, Toothaker said.
Similarly, 18 months ago, as gas prices rose, Toothaker saw the RV and manufactured home industry in northern Indiana begin to decline. He viewed this as a red flag signaling difficult economic times ahead, for both the region and the nation.
A decline in the Florida condo market served as another early warning sign for Toothaker.
"We were invited to bid on many development properties that were in trouble because they weren't selling, and now units that were completed--but not sold--were reverting to apartments, giving us mixed properties we were trying to manage," Toothaker said.
Barbara Holland, president of H&L Realty and Management Co., Las Vegas viewed downturns in the local housing market in 2007 as likely indicators of trouble ahead. With that in mind, in the last quarter of 2007 her company expanded its market survey, visiting every apartment community in a wide geographic sweep.
"We created flyers to market our strengths and target these properties," Holland said. "We spent more time on leasing and marketing programs, and visited our onsite managers on a regular basis."
Holland's concerns were well founded. In the first three months of 2008, more than 35,000 people in the Las Vegas construction industry lost their jobs. Work at some large scale building sites has ceased and most likely will not resume until 2010. Major hotels are also laying off employees. Many workers have moved out of state, or will move, leaving behind empty housing units.
OPPORTUNITIES AVAILABLE
CPMs can turn disaster into opportunity by coming up with inventive ideas for redevelopment and reuse. This again is something they would have needed to show in their final step to earning their CPM designation and is what sets them apart.
In the early 1990s, Muhlebach brainstormed new ways of filling a half-vacant mall in Wasilla, Alaska. First his company created a best use management plan that included finding temporary tenants and creating a program to merchandise vacant space. One spot was filled by a local chamber of commerce office that paid no rent; a radio station filled another, providing radio spots to management as payment for part of the rent.
"Sometimes the best use you come up with will continue because it is the best regardless of the economy," Muhlebach said. "Or it might be only a temporary best use, as it was in this case in Alaska."
Also in the early 1990s, Muhlebach applied this best use concept to a small, enclosed mall in Washington state. The mall had two anchor tenants and 50,000-square-feet of small shops--all empty.
"When you look at some property types, you know that the original concept was incorrect," Muhlebach said. "Even in a good market this mall would have suffered, but in a down market, it was a total failure."
Muhlebach recommended that the row of shops with their backs to the parking area be turned around, making them part of a strip mall with outside entrances. The stores on the opposite side of the mall, with their backs to a wooded area, were leased en masse to serve as classrooms for a community college extension.
In another creative effort, after looking at his management plan, analyzing the marketplace and thinking "outside the box," McGrew recommended turning a heated and air conditioned Kmart location, vacated after the company filed for bank-ruptcy in 2002, into a mini-storage facility. The lender balked at the idea until McGrew explained that the area's demographics--people living in smaller housing units lacking garages or other additional storage--supported his plan. With that in mind, the lender also agreed to fence the Kmart's large parking lot and develop it as drive up storage for motor homes.
Similar opportunities are available now. For instance, Toothaker recently helped a condo developer--caught in the middle of the sellout stage--change unsold condominiums into rental units.
"One of the markets this particular property appealed to was students at a local college," Toothaker said. "To make the co-habitation of condo owners and rental residents as congenial as possible, instead of allowing the students to conduct their own parties, we hold parties for them and invite all the residents."
New opportunities will continue to appear as the downturn hits more businesses. For example, McGrew said he might consider offering properties that were formerly home to auto dealerships, and are located along highways with high traffic counts, to companies that erect giant media signs.
Known as "interactive signs," these electronic wonders rotate advertisements of as many as twenty different businesses and earn as much as $8,000 per advertiser per month.
"They are a bit obnoxious, but they are another way to use a property in tough times," McGrew said. "Cities like them for their tax revenue base. They don't bring in as much in taxes as the auto dealership, but most cities are receptive to approving the signs because some taxes are better than none."
APPLYING KNOW HOW
Knowing how to capitalize on the expanded needs of potential clients helps CPMs attract more business, not less during a downturn.
For example, Toothaker already has picked up some new contracts: first, from people who have been managing their own properties and are not doing well; second, from retail developers who are in the midst of construction with their properties and have been caught short.
"A lot of people get into the business of owning real estate and figure they can manage it for themselves," Toothaker said. "The property may not perform to its optimum, as it should if it's professionally managed, but good times will cover a lot of ills. But as a decline comes on and things begin to fail, they need help."
The expanded needs of current clients are another important focus for CPMs. During the downturn in the housing market it's important to concentrate on renewals, Holland said. Her company throws renewal pizza parties for apartment residents and offers rewards such as carpet shampooing to those who renew their leases.
To attract new residents, Holland suggests offering referral fees to current residents. Similarly, incentive programs can inspire management company employees to fill apartments.
Management activities will become more intense as CPMs work through these and other problem-solving scenarios with their clients, Toothaker said. In an economic downturn CPMs need not reduce their fees to retain clients nor to attract new business.
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