“We’re not out of the woods yet.”
That straightforward assessment of the current post-COVID-19 state of affairs comes from Cindy Fisher, president of McLean, Virginia-based Kettler, AMO. That cautionary note is twofold. First, the world is keeping an eye on the movement of developing strains of the virus, which could either fade away in resurgences of masks and other safety protocols or, if left unchecked, edge us toward a replay of 2020.
Second, even without the overhang of virus news, Fisher’s other cautionary point is that after a year of nearly flatlined NOI, there is a lot of runway left before all of the commercial real estate segments normalize. Nevertheless, assuming COVID-19 spikes are short-lived, Fisher and other professionals remain optimistic, and they see the coming year as one of growth and a return to fiscal health.
“Success in 2022 will come to organizations that are dedicated to leaning into the customer and understanding how to meet them where they are in their lifecycle,” says Jonathan Tucker, CPM, executive vice president at Cortland, AMO, in Atlanta. “It requires us all to be nimble, to believe in our strategies, and to double down on their execution.” That is both a mindset and a business strategy, summarized, he says, by one word: Resilience.
The sliding scale of resilience
Of course, resilience is relative, and not all boats are being raised equally by this fledgling upcycle. National Association of REALTORS® (NAR) Chief Economist Lawrence Yun breaks down that reality as follows: “Rental demand is coming back strongly with the recovery of jobs, pointing to solid demand in the apartment sector. The industrial sector will also continue to do well, as online shopping will remain strong.”
Regarding those other segments, “Office demand is not coming back yet,” Yun says, pointing to still-rising vacancy rates. Colliers reports that the average U.S. vacancy rate for the second quarter of this year stood at 14.2%, a 100-basis point uptick from the first quarter. “Property management work may require repurposing space for different and alternative uses.”
Not surprisingly, retail is also feeling the post-pandemic pinch. While Yun predicts a revival of consumers in quality shopping centers, he says there are, overall, too many malls that will require repurposing into gyms, suburban office spaces, medical spaces, vocational schools, and so on.
Fisher, whose company manages some 20,000 market-rate and affordable-housing units throughout the East Coast, agrees. “Retailers will continue to have a tough time into 2022,” she says, referencing the patterns she has picked up on in her firm’s mixed-use properties. “Those were certainly the hardest hit in some of our assets.”
The path ahead
So therein lie the drivers of Fisher’s frank assessment that we aren’t out of the woods. But what about the path forward? What trends will drive the road to full recovery? Resident and tenant engagement, increased automation, and an enhanced focus on value are the threefold answer (we will address the value proposition a little bit later). Interestingly, these goals were not discovered, but rather accelerated during the COVID-19 pandemic. “We were talking about digital tours long before the pandemic happened,” says Fisher, exemplifying this clarification.
Starting with the engagement piece of the puzzle, Fisher says her shop early in the crisis began surveying residents about what their experience would look like after the pandemic and how people want to live in their spaces. “We confirmed a need for more green and outdoor accessibility,” Fisher says. “Designs are shifting to activate more amenities to accommodate resident expectations and a subsequent shift in services.”
Some of those needs will remain “evergreen,” to use Fisher’s word; others, not so much. “Will we need pods over our exercise machines? Probably not.” But many of the systems put in place, especially tech-enabled systems to ease efficiency and make tenant engagement “frictionless,” are here to stay.
Tucker agrees. He describes 2020 as a “great reset period of education for our industry. We realized once again how much we impact the people we serve.” He says that the hurdles standing in the way of the full realization of that service will remain, listing among them the eviction moratorium and the need to work with state and local authorities to help residents. Also included in that shortlist of hurdles are ongoing tax legislation and the federal infrastructure bill.
He also agrees that the wants and needs of residents have changed, and puzzling out what new expectations will remain or disappear will be an ongoing challenge. “We’ve seen a lot of changes in our resident profile,” he says. “People have changed the way they live.” More work-from-home options, a spike in package delivery, and a boom in pet ownership all carry implications for property managers.
In terms of the technology piece of the puzzle, both Fisher and Tucker say this arguably was where we saw the most obvious acceleration of pre-COVID strategies. “Like other organizations, we’re looking at ways to automate everything,” Tucker says. “Whether that’s site-specific or back-office activities, it’s all in the name of better and more efficient services. That’s front-of-mind for everyone right now.”
Fisher agrees. “We had already consolidated our systems and had the platform stabilized, but 2020 was a wake-up call.” Yes, new technology involves capital expenditure, but done right, operations become even more efficient, saving money, ultimately, Fisher says. Hunkering down in the implementation of business intelligence tools was what Fisher considers her biggest tech innovation of last year. The collection of data for analysis and, ultimately, for forecasting, is “Nirvana,” she says. “People still fear transparency; I’m a big believer in it.”
Back to the future
Yes, certain sectors, especially office and retail, still have to figure out their paths forward. The good news is that the backdrop of a general economy that is growing increasingly robust will certainly help that effort. So will a post-pandemic renewal of the basic principles of property management.
On the first score, “The economy is recovering faster than anticipated, with unemployment likely going back to historic lows by the end of 2022,” says Yun. “Commercial real estate activity will rise with the economy and the commensurate need for property management.”
On the second score, “Everything has changed,” says Tucker. “COVID-19 made us redefine our best practices.” Next year will be a time of continued redefinition and more attention focused on “the new needs of occupants and residents and pivoting our business focus accordingly.”
Hurdles aside, both Tucker and Fisher are optimistic about the outlook for 2022. Tucker, whose firm manages some 67,000 units in seven states, explains that outsized performance in the second quarter of 2021 has led them to reforecast 2022 and project 4.5% rent growth next year, possibly with only a slight flattening. That is the average across all of the 630 submarkets his company tracks. “We’re seeing in 2021 all the movement that didn’t occur in 2020,” he says.
Fisher, too, is looking forward to the coming year, based on what she has seen to date. “I’m very optimistic,” she says, although, like Tucker, she sees normalization as an ongoing process. “Our recovery time will continue in 2022.”
“We’ll still need to make up for last year,” she continues. Playing catch-up will involve addressing increased pressure to optimize rent growth and expense management through such initiatives as revisiting all vendor accounts. “How we all get to that bottom-line NOI will be the question. The name of the game is long-term value, and I want to pull all of the levers I can to achieve that. That’s my job.”
Importantly, she adds that this has always been at the heart of a property manager’s call to action. That is the reset that COVID-19 brought and that Tucker referred to as proof of the industry’s resilience.
Yes, automation will help. But so will the renewed focus on engagement and, as Tucker states, leaning toward the tenant or resident rather than them leaning toward the manager. Both CPMs see the road ahead as marked by renewed diligence, and indeed, by more resilience.
“We’ll have to keep our pencils sharp and our heads down to focus on all aspects of property management in this period of renewed recovery,” Fisher concludes.