Four Steps Fee Managers Should Take Before Entering New Markets

When a special servicer asked Dave Woodward, CEO of Laramar Communities, a Greenwood Village, Colo.-based owner and manager with around 30,000 units, to jump into a new market, their relationship played a key role in Woodward’s decision to say yes. The geography just made it easier. “We wanted to continue that relationship and grow with them,” he says. “You don’t want that bank or special servicer to call someone else.”

If you don’t say yes, that means the client will start talking to other managers. “You don’t want to give them the chance to say, ‘Let’s find someone local,’” says Mark Fogelman, president and chief operating officer of Fogelman Management Group, a Memphis-based manager with 18,000 units. “There’s always someone approaching our clients who would love to have the chance to manage their properties.”

So when faced with the threat of losing business, property managers tend to look for a way to make the opportunity work. After all, there’s little to lose, Woodward says. “The incremental cost to go into a new market is not that much,” he says. “It’s not like starting a manufacturing business. If you don’t have enough people, the cost is associated with flying people in and out.”

Fogelman, though, isn’t sure it’s that easy. He warns that there’s a lot to lose. “Your reputation is everything,” he says. “All it takes is one public termination of a management contract, and the word is out that you’re not a quality company. You have to approach every fee management assignment carefully and make sure you succeed in it.”

2. Do your due diligence.

Most people don’t take two years to do their due diligence before they move into a market, as was the case with Mark-Taylor, but many apartment owners and operators start at the same place—with plenty of questions. “We ask questions of everyone and anyone we can get our hands on,” Danuser says.

You can often start this search in house. “We happened to have some people we relocated from this area who work for us who were very familiar with things and knew the ins and outs,” she says.

Firms often rely on local friends and apartment associations for information as well. “Accessing the brokers is a great way to get started,” Woodward says. “Other good sources of information about the market are M/PF Yieldstar and Reis. [The due diligence process] takes a lot of mining information and cross-checking.” Dominium also goes through every shard of information it can find while pounding the shoe leather. “Before moving into a new area we put substantial effort into understanding the demographics, population trends both in the past and going forward, and the rental real estate market in the area surrounding the property,” says Chris Barnes, a project partner at Dominium. “This is accomplished not only through third-party reports, such as market studies, appraisals, and demographic reports, but also by personally visiting the property, driving the area, and visiting comparable properties within that market.”

However, there’s more to exploring a new market than just knowing the rents, concessions, and market nuances. You need to also be aware of key laws in those markets. For instance, Danuser says in Oregon anyone renting an apartment must have an established office, even if it’s a back office at a property. “You have to understand all of the municipality laws and the state laws and everything to do with employment and opening a business,” Danuser says.

Therefore, it’s critical to seek professional advice about each market’s legal nuances. “We align with consulting expertise to help us get up to speed with taxation and employment, and all of those things are very different everywhere you go,” says Rick Graf, president of Seattle-based Pinnacle, the country’s largest property manager, according to the 2009 MFE Top 50 Managers list, with 185,219 units nationally.

3. Look for geographic efficiencies and build regional strength.

You schooled yourself on all the ins and outs of the new markets but don’t forget to ask yourself if you have the manpower to handle the gig. Fogelman and Woodward know the drill. They recently faced similar dilemmas when longtime clients asked them to move into peripheral markets—Corpus Christi, Texas, and Spartanburg and Greenville, S.C., respectively. After careful consideration, both executives took advantage of the opportunity to expand their portfolios.