We’re talking to one of our long-time clients, Jeff Hacker, who runs Bayside Management and Leasing. He was on The Property Management Show three years ago, and we love talking with him because he’s been in the property management industry for 20 years.
He was with Bayside during the great financial meltdown between 2007 and 2009, and we asked him to come back and share with us some of what he learned as that crisis unfolded. We also wanted to know what he’s doing to prepare for another potential crisis in the industry.
Learning from the Past: How the Crisis Unfolded in 2007
Jeff recalls the crisis building slowly the last time.
Interest rates were going up and the news grew more negative over time as he tracked real estate industry trends. People were not able to make their mortgage payments. The default rates were rising. Most people had an inkling that something was going on, but no one expected it to be as severe as it was. People generally try to be optimistic. Everyone remembered the savings and loan debacle, and there was a general sense that whatever crisis was looming, it would pass and not be too significant.
But, as 2007 and 2008 and 2009 wore on, it became clear that this was something truly catastrophic. The significance of this economic event was pretty widespread.
From a property management point of view, the industry was lucky in some respects. While there is no industry that’s truly recession-proof, property management in general can weather a financial storm better than other industries because people always need a place to live. Even if they’re not owning homes, they need a place to rent. So, while not completely insulated from the effects of a huge recession, property management usually does not go to pieces.
Jeff said that what he noticed early is that as the crisis was unfolding, applications were coming in for vacancies from people who had owned homes. They defaulted on their mortgages or their mortgage companies foreclosed on them.
Some of these homeowners purchased a home with an income-only loan. They put five percent down or in some cases, they put zero percent down. So, there was not a lot of skin in the game. They borrowed up to 100 percent of the mortgage, so when the house was suddenly worth less than the mortgage, people walked away.
One of the things that Jeff learned was to be significantly more proactive with landlords and investor clients at Bayside.
A surprise during the last recession was the number of layoffs that came from the financial meltdown. Jeff would have liked to have been more prepared for the number of job losses that impacted the industry. This led to more vacancies.
When a tenant loses a job, they may be okay for a month or two. But then, they’ll vacate because they’ll need to move in with someone else to save money on housing. Or, they’ll move for a new job.
Homes sometimes have to be rented out for less than an owner would like in a business environment such as this. Jeff learned the importance of being proactive with owners; to explain this situation and to let them know what to expect. There may be less rent. There may be multiple vacancies.
Jeff said another thing he would have liked to have done better is to suggest that owners lower their rent in order to keep tenants who were struggling. While no one wants less rent coming in, it’s better than a vacancy during a recession.
Current Layoffs and Recession Fears
In the San Francisco Bay area, where Bayside Management is located, there have recently been mass layoffs in the tech industry. Jeff said this has led to layoffs, and proactive steps have been necessary.
Local tenants who have been laid off by a tech company could move out of state. They might take a job Texas, Florida, South Carolina, or one of the areas where companies are relocating. There has been a lot of migration out of California.
On the flip side of that scenario, there are still a lot of start-ups in the area, and tech employees who were laid off from large companies can quickly find new jobs with smaller companies. That allows them to stay in the area and continue paying rent.
Jeff is talking to his owners about these potential issues. He’s discussing ways to prepare for every possibility. Ideas include:
- Possibly holding rents flat instead of raising rents.
- Maybe reducing rents in order to keep tenants in place.
There has been a positive response from owners, especially after they see the data and understand the numbers. It’s difficult to accept; costs are going up and every owner wants to maximize what they earn. They look for increases every year. This makes sense. While there has been some push back, there has not been a loss of any accounts. Jeff and his staff are talking to owners in order to prepare them. It’s an ongoing conversation.
Owner Outreach during a Potential New Recession
Jeff is worried about churn with the real estate industry on the cusp of a potential new recession.
In 2008 and 2009, a lot of investors began self-managing just to save some cash every month. All of us know that property management services aren’t expensive, and they’re worth the investment, but some owners feel a need to save that hundred or two hundred dollars every month.
At Bayside Management, there’s an outreach program in place to avoid this kind of churn as a new recession approaches.
The objective is to not lose owners to self-management, even if this means reducing their management fees for a little while.
The proactive outreach is important. Getting in touch with owners to talk about the market has become a priority, and they’re feeling out how the owner is likely to respond.
This began for Jeff’s team in August or September of 2022, and there’s been a staff training built around it. They have a script. They have talking points. They have come together as a group to talk about how to handle these conversations.
Each owner is contacted by the person on the team who has the best relationship with that owner. Since Bayside operates within a portfolio system, it’s usually the property manager assigned to an owner who makes the call. In some cases, Jeff gets involved because it’s a larger client.
Lowering Property Management Fees to Keep Business
Jeff isn’t offering lower fees across the board.
It’s a part of their effort to avoid churn when it’s absolutely necessary. He knows which clients are likely to leave when they get nervous about spending money. These are the owners who will invest in the properties as much as they need to in order to keep the property in decent shape. But, they won’t do any remodeling or bring in new amenities and improvements.
After the experience of 2008 and 2009, Jeff knew that those owners most concerned about costs would be the ones to leave if another recession approached.
Dropping fees for a temporary period of time might save them from self-management.
Jeff said that Fourandhalf has helped him look at the cost of acquisition really well. They know that it takes thousands of dollars to acquire a single client. So, instead of spending that money to find new clients, they’re willing to drop their management fees in an effort to keep the clients they currently have.
The reduction is temporary; no more than a year. It isn’t discounted forever. This is offered as an acknowledgement that there may be a recession coming and that inflation is hurting everyone. It’s a real possibility that rents will remain flat.
Property Management Industry Trends
We asked what has changed in the property management industry, and what Jeff believes property managers should be looking out for. He highlighted two specific things:
- A lot of people were chasing investment properties. Whether they had big pockets or small pockets, everyone was trying to buy investment homes. This drove up property values substantially around the country, and especially in more desirable cities. Home prices kept going up. That’s not sustainable, and there’s only so much inventory. This drive in investment buying kept a lot of first-time homebuyers from getting into the market.
If you’re a property manager in one of the markets that really benefited, you probably brought in a lot of business. But, those market conditions cannot last forever.
- Automation. Almost everything is automated in property management, now. Whether we’re talking about showing vacancies or using management platforms for rental accounting and maintenance work orders – it’s all automated. That makes the property management experience better for owners. It’s more transparent. It also provides tenants with new ways to communicate. Property managers can track everything and really show owners all the work that’s being done.
Growth is expected even with a possible recession. Jeff said he likes to focus on growing the company five to 10 percent every year. They’ve been pretty successful in the past, and they’re also very focused on keeping their client base. This year, they want to maintain their base of clients and avoid churn.
Which is another good way to grow.
Retaining your current clients is growth. A lot of property management companies are hyper focused on getting new clients in, but watch that leaky bucket. You don’t want to lose existing clients, otherwise you’re not really growing.
Thanks to Jeff for talking with us. If you have any questions about his work at Bayside Management and Leasing or you’d like to talk to us about your property management marketing plans, please contact us at Fourandhalf via the form below.