The Third Wheel The Ups and Downs of Third-Party Management
Like any business venture, third-party management has its pros and cons. For Gables Residential, the business has more positives than negatives. “Some guys hate this business,” says Chris Wheeler, CEO of Gables, based in Boca Raton, Fla. “We have been in it for 20 years and continue to like it.”
Gables’ fee portfolio jumped from 24,333 units in 2002 to 30,059 in 2003, the year the company purchased Archstone-Smith’s fee-managed portfolio.
The business has a wide range of benefits, Wheeler says. Since third-party management isn’t very capital-intensive, Gables’ return on invested capital is good, Wheeler says. “Once you have a critical mass [of properties], you can make a profit in the business.” Plus, a larger portfolio means additional operating efficiencies due to economies of scale.
It’s also a great way to get independent feedback from other institutional owners on the strengths and weaknesses of your management, Wheeler says. “They [your clients] will tell you every day whether you are doing a good job or not.”
Wheeler does note that third-party management is a difficult business and vastly different from the REIT infrastructure. Each fee client has a different set of needs, including accounting formats and software packages. But Gables has found a way to deal with those issues. It has a separate back office and accounting shop to handle the third-party business. “Because of that, there are not as many conflicts, and it is easier for us to manage and make a profit,” Wheeler says.
But many of the large companies are deciding not to tackle third-party management, instead focusing on their own properties. “Over the years, we have wound that part [third-party management] of the business down,” says Timothy Naughton, COO of AvalonBay Communities Inc. “The market just doesn’t seem to compensate third-party managers.”
That’s why Archstone-Smith sold its third-party portfolio to Gables Residential. “We liked that business because it was so closely related to what we do, and we believe that we have central resources that could be applied on behalf of not only properties that we own but also properties that other people own,” says Dana Hamilton, Archstone-Smith’s executive vice president, national operations. “But we also believed if you are going to offer a premium product, you should be compensated for that.” So the company decided to focus its resources on its own portfolio.
Apartment Investment Management Co. (AIMCO) also chose to concentrate on its own properties. The company had a large third-party business but has scaled back.
“It’s hard to have heart and soul in the management, if you don’t have a say in the fate of the property,” says Jeff Adler, AIMCO’s executive vice president for conventional property operations. “If one has the choice, it’s easier and more efficient to be an owner and operator.”