The President's Report

Looking Ahead to a Transitional Year

by Marc Wilson

Happy New Year! 2005 was a great year for this business. Property values and sales prices were simply stratospheric, the rental market strengthened and what’s left of your property rights remained generally intact. Good news on all fronts. Owners had good cash flow, interest rates remained low and property managers swam “downstream” with a cooperative rental market, happy owners and well-behaved tenants. Best of all, real-estate brokers made more money than God. Yes sir, these are definitely the salad days.

It’s actually kind of scary. I’ve been in this business long enough to know that this coin has two sides. The real-estate business has been running pretty hot for quite some time now—lots of new faces and lots of new money. I can’t help but notice what appears to be increasingly lofty expectations, maybe even a sense of entitlement within the industry. Many people I meet today feel entitled to so much. We should always keep in mind that we are entitled to nothing. We are not entitled to our jobs. We are not entitled to current property values. We are not entitled to current interest rates. And we are not entitled to current market rents. All of these things are subject to change—and change they will.

I remember what it was like in 1983 when I was working with a large real-estate syndication firm. Talk about heady. Talk about arrogant. We all had secretaries. There was a professional masseuse that traveled by appointment from private office to private office, an exercise gym and a fully stocked blended-fruit drink bar. All of the executives were driving expensive European sedans. I was just out of college and very impressionable. I thought that these luxuries were “the American way.” I thought that if you went to a good college and worked hard � in short, I felt entitled. Then came the 1986 tax-law change, and the whole business went down the toilet. It went from something to nothing almost overnight. One day I’m flying first class around the country, and the next day they’re taking the company name off the building. The music just stopped. It was a “transitional year.”

I’m no prophet, but 2006 is also starting to look like a transitional year. I think some of our “entitlements” are starting to dry up. Increasing interest rates and an abrupt end to speculative buying will probably conspire to soften the real-estate market. This is completely normal. Try not to personalize these changes. You might end up working twice as hard to make less money over the next couple of years. Your net worth might go down. Your vacancies might go up. Your tenant-turnover might increase. Your rents might go down. These are predictable and normal changes in a transitioning market. Remember: the race goes to those who can last. I’ve seen a lot of good agents leave this business during transitional periods. I guess they couldn’t reconcile their expectations—their entitlements—with the changing reality. Survival in the real-estate business depends upon one’s ability to adapt to change. The old joke is that the most important qualification for success in the real-estate business is the ability to go without income for 2 years every 12 to 15 years. Besides, most good real-estate agents know that the time to start buying apartment buildings coincides with the time that you are no longer generating sufficient commission income. I’ll know that it’s time to start buying again when my sales manager is thinking about firing me for lack of production. Hopefully, I will have the brains, the ability and the fortitude to recognize this opportunity when it emerges.

Are there any appropriate business strategies for transitioning markets? I can think of several. First and foremost, maintain a positive attitude. Attitude is everything, and you are absolutely in control of it. Don’t let a transitional, changing market affect your attitude. Decide to be happy. Decide to be optimistic. Decide to be healthy and productive.

Be sure that your vacant apartments for rent are in absolutely perfect condition. No exceptions. Price your apartments so that you receive multiple applications and select only superior tenants. Place pictures in your Craigslist advertisements. Include pictures of the interior and exterior of the property as well as pictures of any local amenities such as parks, museums and other interesting features. Many prospective tenants sort the multiple Craigslist advertisements by looking at only those ads with pictures.
Do not compromise the quality of your tenant profile. If you are not getting quality applicants, lower your asking rent. Nothing makes it more difficult to comply with strategy number one (positive attitude) than difficult, unappreciative tenants. Don’t accept tenants with dogs just because the rental market starts to get difficult.

Figure out where you will get the acquisition cash when and if the market presents buying opportunities. Refinance some cash out with five- or seven-year fixed-rate paper today. Do not spend this money on cars and vacations; place it in an account earmarked for building acquisitions.

Maintain your properties. Don’t delay capital improvements like roofs and window replacements just because we might be in a transitional market. Don’t ask what your building can do for you; ask what you can do for your building. Be responsive and proactive with your management responsibilities.

Don’t bother with government programs like Section 8. In my opinion, they are not worth the trouble. Why would people operating in one of the most overregulated businesses on the planet volunteer to further hobble themselves by working with the San Francisco Housing Authority? In fact, now is a perfect opportunity for you to rid yourself of this bureaucracy. Don’t adjust your rents downward if HUD imposes an increase on the tenants’ portion of the rent payment, even if the total contract rent is well above market.

Be thoughtful and careful about any TIC-conversion plans that you might be entertaining. Make sure that your pencil is sharp. TIC units will be particularly vulnerable in a falling market.

We are extremely pleased and excited with the popularity of our Monday night general-membership meetings, which take place the third Monday of every month (except for in January and February, when the meetings are held on the fourth Monday). We had over 450 members at November’s TIC-conversion class. My heartfelt thanks to all of our 2005 speakers and panel participants. We had professional instruction and interactive seminars on revolving tenancies, pets, managing poor or nonexistent written agreements, navigating small claims court, offers to lease and the application process, security deposit dispositions, late rent payments and Section 8 tenancies. You can’t buy this kind of instruction. Your presence, questions and participation at the meetings make for an unparalleled and rich learning experience. If you haven’t been to one of our meetings for a while, give us a try. I think that you will find that we have “kicked it up a notch.” Bring a friend—you can bribe your guest with a steak dinner at Izzy’s Steak House after the meeting. I hope you have a happy and prosperous 2006.

The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine. Marc Wilson is the president of SFAA. Marc has specialized in the brokerage of San Francisco apartment buildings for 20 years. He can be reached at 415-229-1275. Copyright � 2006 by the San Francisco Apartment Magazine. All rights reserved.