Posts Tagged Economic Downturn
So what drives the property management industry? Let’s talk first about what property management is: basically, it is managing a real estate asset for the owner of that property. It is driven by that owner purchasing a property, whether it be a commercial, industrial, institutional or residential property, and then hiring someone . . . a property manager, to do all the things necessary in order for that property to continue to be a viable and income producing asset.
At any given time, there are a certain number of properties out there in the marketplace which are in service and being managed by a property manager. That number is going to change very little. If anything, though, over time, the number will tend to increase.
What creates income property or rental property as you might call it? The commercial, industrial and institutional markets are driven by new buildings being built or sold. In the residential market, which is the primary focus of this book, a change in use or a sale of property are primarily responsible for creating rental properties. Another, very minor contributor to the rental property market is new construction. Depending on your locale, new homes or condos may or may not be at a price point to compete with the resale of homes.
Our experience with our owners was that most of them created new rental property by purchasing a home for the specific purpose of creating a rental property investment. Others would purchase a new home for themselves and move out of their old home and put it in service as a rental.
OK, I went through all of that rigmarole to say this; with my background in home building and land-development, I have been through some pretty gnarly economic times. Consequently, I tend to view things through my worst-case glasses. So when I look at the residential property management industry I ask; so what will cause this industry to slow down or crash? In home building the vitality of that industry is tied primarily to jobs and interest rates. If people are not secure with their jobs or if interest rates are too high, they don’t buy as much. But what about property management? Do people quit renting when the job market gets sucky (sucky is a technical term!)? Not directly. But if the job market is horrible, as in, jobs are moving out of your area, then rents will slow down and the rental rates will trend downward. But the real story is that if the job market gets sucky, people are less inclined to purchase a home, but they will rent instead. What about interest rates? Same story. People are more inclined to rent a home and wait out the interest rates. Remember . . . they have to have a place to live.
The two places where we have seen vulnerability in the property management business are: softening of rental rates when the job market is soft and a sell off on the backside of an economic downturn. What the heck does that mean? Picture this scenario; property owners are continually buying and selling their rental properties . . . for various reasons . . . life happens. When the economy gets nasty and property values take a nose dive, owners (unless they are in dire circumstances) stop selling their properties. This is due to a couple of reasons: 1.) They are upside down on their property . . . they owe more on their mortgage than the property will sell for. 2.) They don’t have to sell and to sell in a down market causes them to lose money. They will simply wait the market out. And wait the market out they do!
Our experience is that once the market returns, or at least starts to improve (the backside of the economic downturn), owners who chose not to sell earlier are now incentivized to sell. It is a sort of a mini pent-up demand for selling. Property values are now finally high enough that they can sell and pay off their mortgage, or, their loss will be less.
In a recession, in which at its worst, property values dropped 25 to 28%, we experienced a 10% sell off of properties on the backside of the downturn. Not great, but had we been the owners of all that real estate, we would have been looking at much greater losses.
The key: continue to increase your business with the static market during the downturn. That way, if you do experience a sell off, you can hope to end up where you were prior to the economic downturn. If not . . . you have 10% more business . . . WOO-HOO!!