High Hurdles

Outlook 2004

In the long run, vacancy rates hinge on two critical factors: home buying and the economy. If the economy gets better in 2004, interest rates could go up, which should create more jobs — welcomed news to multifamily firms. “I think we are totally at the mercy of job growth,” Pope says. “When companies start to hire more people, our existing inventory will be absorbed and we will get back to where we were. Until there’s job growth, I don’t see enough people coming through our doors.”

Unfortunately, other firms don’t see 2004 bringing in more renters. “I don’t see the overall economy changing a lot in 2004,” Eddington adds. “We still anticipate concessions being a way of life for the industry.”

3. Slashing Overhead: Cost Cutting Craze Sweeps the Industry Multifamily firms are feeling the squeeze from declining revenue and increasing insurance and utility costs, so it’s only natural to look for ways to control expenses. “When the revenue line is under a lot of pressure, it just forces you to be much more attuned to your operating expense environment,” says Eric Bolton, president, CEO, and chairman of Mid-America Apartment Communities Inc., in Memphis, Tenn.

The Solution

When the time comes for businesses to cut costs, most people assume layoffs will follow. But this wasn’t always the case in 2003. “We have not cut the payroll category,” says Steve Heimler, president of Stratus Real Estate Inc. in Sherman Oaks, Calif. “When it comes to staffing, more is more.”

That does not mean other employee expenses won’t be touched. Employee costs, including insurance and salary, eat up about one-third of a firm’s expenses, estimates Tom Toomey, president and CEO of United Dominion Realty Trust Inc. in Highlands Ranch, Colo. In 2003, multifamily operators attempted to control these costs by reducing pay raises and benefits, he says.

Companies may also reassign their employees to cut costs. In the summer, when residents often move in or out, Mid-America traditionally uses contract workers to prepare units for new renters. But lately the company staggered the work hours of its current employees so they would be available to prepare the units during longer periods of time. “We are much more aggressive in managing fixed costs with our staff so we don’t have to run up variable costs with contract labor,” Bolton says.

If payroll cost cutting proves impossible or does not provide enough relief, then it’s time to look at other costs. Mid-America focused on its advertising budget in an effort to find where its leads originate. This led to a cost-saving discovery: The Internet was generating many more leads than other forms of advertising. “This has afforded us the opportunity to cut our print and billboard advertising, which tend to be more expensive,” Bolton says.