Managing Properties in Tough Times The State of the Industry

Managing Properties in Tough Times

 The economy cratered—to use a term in popular parlance at that time—in September, 2008, with the collapse of too-big-to-fail Lehman Brothers. While the measures undertaken by the federal government and the Federal Reserve  averted complete financial meltdown—it never reached the point where we had to transport the necessary dollars to  buy a loaf of bread in a wheelbarrow, as happened in Italy a few decades ago—the last few years have been a litany of ominous economic indicators. Unemployment: in the double digits. Consumer confidence: an oxymoron. The Dow: mostly down. Property values: a fraction of what they were a few years ago. Foreclosures: way up. About the only positive is the interest rates, which hover near all-time lows. Mix in the mounting deficit, the Moody’s downgrade of U.S. T-bills in mid-2011, and a growing populist uprising  centered around income inequality (and camped out across the river in Lower  Manhattan’s Zucotti Park), and it’s not a boon time for much of anything to do with real estate—in New Jersey or much of anywhere else.  

 Economists and real estate brokers alike seem convinced that 2012 won't break  much differently than 2011. When the good times return, they will do so slowly. How does the bleak economic outlook affect the property management industry, in  the Garden State and across the U.S.? Let’s take a look at the situation in various markets across the country:  

 Slow & Not So Steady

 Like the rest of the economy, the property management industry remains sluggish.  

 “Home values have definitely decreased in New Jersey over the last five years,  there's no question about that,” says James Cervelli, a property manager at Cervelli Management in North Bergen.  “That's affecting property managers who live in condo buildings who bought  something of a certain value and the value is not there any longer.”  

 There is also the lingering problem of foreclosures that are affecting  properties in the entire spectrum, from high-end condominiums to modest  townhomes.  

 “We’re still seeing foreclosures,” says Lori Burger, senior vice president of both the Institute of Real Estate  Management (IREM) and the Eugene Burger Management Corporation, which is based  in California but operates offices throughout the country. While governments—state and federal—and some of the banks themselves, have worked to stem the flood of foreclosures,  they still happen, and they don’t seem to be slowing down. “Foreclosures were higher in 2010 than the year before. I don’t see them changing in 2011 or 2012.”  

 According to RealtyTrac, a nationwide information service that tracks real  estate foreclosure filings, New Jersey is in the top 10 states in the country  in the number of foreclosure actions filed with 42,156 properties in some state  of distress—(notice of default, lis pendens, auctioned, sold in foreclosure or foreclosed  and owned by the bank). An NJ.com article however, puts the actual number even  higher, saying that more than 100,000 cases exist of properties either  foreclosed upon or those that are waiting for papers to be filed.  

 In markets with higher percentages of condos that are second homes, vacation  homes, and investment properties, it's easier for owners to sever ties if all  hope of breaking even is lost. “The problem here is, the value’s not there in the units,” Burger says. Owners who bought at the peak of the real estate boom now owe more—in some cases, much more—than what their unit is worth in 2012 dollars. They can’t sell them for enough to make back their initial investment, Burger says, so  they simply walk away. Owners are more likely to stop putting money into the bad investment, just as  they would, after a time, sell a stock at a loss. “It just doesn’t make sense to hold onto them.”  

 Devastating enough in a neighborhood of detached single-family dwellings  complete with white picket fences, foreclosures impact HOAs even more. Unlike a  dumped stock, this has an adverse impact on each of the other owners in the  HOA. “When units go to foreclosure, those uncollected assessments have to come from  somewhere,” Burger says. “They’re sitting on uncollected debt.”  

 Not every delinquent owner is an investor, however. “All of the individuals in the buildings, they all work in business, and  businesses aren’t doing well,” Burger says. “I know some very affluent people, individuals who have served on boards—they’ve lost their homes.”  

 More ominously, the retail market is hurting. Longtime anchor stores in some neighborhoods—supermarkets, Borders bookstores—are shuttering their doors. “Major retailers, well established commercial retailers, are going belly up,” Burger says. “It’s really frightening. The commercial retailers can’t refinance, so they go out of business.” This removes hundreds of jobs from the area. “It’s a trickle-down effect.”  

 Managers, Too

 The bleak economy has also affected how property managers do business.  

 According to Paul A. Santoriello, president of Taylor Management Company in  Cedar Knolls, “The slumping economy doesn’t impact us as significantly [as other industries] because there’s simply a lot out there to be managed. Management companies are not  recession-proof, but we are recession resistant.”  

 On the other hand, Santoriello continues, “Our clients are not, and we all have to focus on them—the homeowner and unit owner—from the perspective of their own ability to make payments, protect against  foreclosure, and to address the needs of their community. There are always  communities that are in immediate need of services, and that sometimes comes at  a bad economic time. Because of the age of some communities, they’re running into an environment where capital items such as roofs and facades are  deteriorating and their infrastructure needs to be attended to. Unfortunately,  in these difficult economic times, those buildings are in a less-opportune  position to address those issues immediately.”  

 And boards—not the most liberal bunch to begin with with respect to spending money—have become even more conservative.  

 “Everybody’s concerned about the financials. Co-ops and condos are corporations,” says Enid Hamelin, director of marketing with Lawrence Properties in Manhattan  and a longtime board member at her co-op. “They’re businesses. With the assistance of the board, the job of the management company is to keep  all ships afloat.”  

 Planning a budget is tricky in these times, as Hamelin well understands. “You have to do it with the understanding that there may be people in the  building with financial troubles themselves. You can’t really raise assessments or maintenance because it might be a hardship to  residents.”  

 Burger agrees. “HOAs are being conservative in their budgets,” she says. “They’re being skeptical; they’re scrutinizing line items in the budget. They’re trying not to have increases. They’re reluctant to spend cash reserves on capital improvements, if they can be  postponed to a later date.”  

 In the past, Burger says, when assessments were needed, unit owners would  refinance their mortgages to cover the cash outlay. In the post-Lehman Brothers economy, this is no longer possible. “Any type of special assessment project is looked at very carefully. Buildings  and associations are phasing projects over time, so owners don’t have to pay the special assessment all at once.”  

 The temptation is for boards to practice austerity—to stop spending money unless it’s absolutely necessary. Burger says it’s important to keep “the core infrastructure in good shape,” citing the roof, walls, and physical plant. “When this picks up, you’ll be in good position.”  

 Not to say that being frugal is necessary a bad thing. Many boards and property  managers are deciding to cut back on certain seasonal amenities and use that  money saved on more pressing matters. Cervelli recalls an association that  previously had their pool open for two weeks more in September but this year  they decided not to. “Usually the amenities that are cut are not on a life-line, it's not like the  grass isn't being cut or the roof maintained, it's more of the extra things,” he says.  

 As managers, “We are going to see a greater strain on our financial department with regard to  creative ways of budgeting, dealing with communities’ financial challenges,” says Santoriello. “And perhaps the most immediate is the heightened level of delinquencies on  monthly maintenance payments. We combat that with the financial management  strength of the company, and having individuals who have expertise in difficult  financial markets. That’s really critical because we’ve seen this situation, and we know how foreclosure works.”  

 More Than Just Collectors

 According to Hamelin, property managers used to be little more than rent  collectors. That changed during the Great Depression. Managers were called on to help with budgets, and to otherwise manage the  finances of the properties during that very difficult time, and are continuing  that practice today, as well.  

 Many property managers such as Cervelli have been able to successfully  renegotiate contracts and obtain services for a lower price. “[The recession] has given us the ability to save associations money. People  understand that they are at a point now where the economy is so poor that if  they want to compete and stay in business, they will have to cut the price,” he says.  

 Jim Stoller, president of The Building Group, which provides real estate and  management services in Chicago, has observed a change in the way which boards  manage finances. “Boards have to have a realistic understanding of expectations,” he says. “The goal is always to recoup all of your money, and the last few years with all  the foreclosures, boards know now that they have to allocate a certain amount  of money for uncollected assessments—which is not something we've seen before.”  

 Historically, this is a major downturn and it is in fact the worst economic  period in the lifetimes of many of Americans. So it pays to be more diligent.  And Stoller says boards are doing just that. “These days we are seeing more sophisticated board members. These are educated  consumers who are looking at budgets line-by-line and looking for the lowest  price and ways to increase revenues—and we like that.”  

 And still, real estate, unlike a T-bill or a stock certificate, remains a  tangible asset. This makes it a solid place to put money—literally. “I still think real estate is an excellent investment,” Burger says. “This is a great opportunity for those who want to come pick up the pieces.”  

 Cervelli agrees, and explains that real estate, like most other industries is of  a cyclical nature: what goes down, will come up. “The biggest challenge I've had is telling boards and associations that this  isn't the end of the world and it's going to be OK,” he says. “Many people think that this is the worst possible thing that can happen when in  reality this happens every five to seven years—it's a hiccup in the real estate industry and a lot of people forget that. This  will bounce back just like every other cycle.”    

 Greg Olear is a freelance writer and a frequent contributor to The New Jersey  Cooperator. Editorial Assistant Maggie Puniewska contributed to this article.  

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