Our topic on The Property Management Show podcast today is something that’s really interesting, especially if you own a property management company. Today, we’re diving into property management market trends.
The guest who’s joining us is Jeff Hacker, owner of Bayside Property Management. He’s finding that a lot of the investors he works with are feeling priced out of the market in California’s Bay Area, and that’s only one of the property management market trends we’re going to talk about on today’s show.
Jeff Hacker and Property Management Market Trends He’s Noticed
Bayside Property Management has been in the Bay Area for more than 30 years, and Jeff has been at the helm for the last 15 years. He works with a lot of small investors who are feeling priced out of the local market, so he’s been helping them invest in other markets. Consulting with local investors who don’t have the budget to invest in San Francisco and the surrounding markets has given him some keen insight into what’s going on in the property management industry all over the country.
Defining the Three Market Tiers
Jeff’s work is taking him through three different levels of property management markets, which we’re identifying as primary markets, secondary markets, and tertiary markets.
How are those defined?
Primary markets are also called ‘gateway markets’, and after those, we have secondary and tertiary markets to buy property. Most people define these markets on population numbers, but that isn’t always the best way to do it. Usually, a primary market has at least five or six million people and then secondary markets have between a million and five million residents, and tertiary markets have fewer than one million people living there.
But from an investment point of view, there are more important factors than population numbers. Jeff suggests that you look at other things. Investors may care less about population and more about:
- Job growth
- Economic strength
- Whether there’s a university or professional sports teams
- Access to shopping, restaurants, and culture
You’ll want to know what kinds of real estate transactions happened over last 10 or 12 years. Research the volume, sales numbers, and what’s going on with the cap rate. All of this plays into how you define each market and decide whether it’s a viable place to invest.
Bakersfield, California is a good example. If you’re looking simply at population, it might not seem like a great place to invest. But, the indicators listed above will show you that even though it’s a small market, Bakersfield is a good spot right now for real estate.
Reno is another good example. Tesla is there now and a lot of people are moving out of California and into Nevada areas like Reno, Henderson, and even parts of Las Vegas to enjoy better tax rates.
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Property Management Market Trends: Shifting Demographics
The biggest change has been in population demographics.
Fifteen years ago, the number of college-educated renters was small. They tended to buy homes. But, when the recession hit in 2008 to 2010, there was a real shift in home ownership. People became disillusioned with owning property, and there was suddenly a fast growing segment of renters who had college educations. They are largely still in the market, and they tend to prefer urban and suburban environments, where they can find single-family homes in quiet and safe family neighborhoods.
Single-family homes made up about 30 percent of the market 10 or 15 years ago, and now they make up 35 percent of the market, and that number is rising.
Other demographics have changed. The Gen-Z renters we’re working with were born in 1997, or they’re a bit younger. The millennial age group covers people born from 1980 to 1997, and Gen-X tenants were born from 1965 to 1980. Finally, we have a large population of Baby Boomer tenants. They were once homeowners, but now they’re renters. They are downsizing and giving up their homes to move into urban areas with walkable neighborhoods. These renters are looking for amenities and access to healthcare and shopping and theaters.
Boomers no longer want the hassle of homeownership. They are simplifying their lives and if they’re not in urban areas, they want suburban areas and planned communities. Retirement communities are growing in popularity.
Younger generations are tech-friendly and they want everything to be electronic, automated, and online. The Gen-Z and Millennial tenants you rent to will expect WiFi in their homes, and they’ll want to sign everything electronically and communicate with texts. They are hoping to build credit and establish themselves in a rental property. They’re also more laid back and casual.
New Challenges in the Property Management Industry
The challenges are significant.
Jeff identifies the three biggest challenges for property management companies as:
- Tenant retention
- Portfolio loss
Tenant retention is significant for property managers. You want to retain good tenants, and that was fairly easy over the last 10 years, when occupancy rates were high. They were at 50 or 60 percent pretty consistently, but we’re expecting the occupancy rate to fall to 40 percent over the next few years.
To retain modern tenants, property managers need to be responsive and empathetic.
Tenants want to know they’ve been heard and that their needs have been taken into consideration.
Tenant retention is also related to job growth. With tenants getting new jobs and moving closer to work, retention will be difficult.
Portfolio loss is another huge and recent challenge. A lot of larger institutions and well-funded investors are buying up a lot of the available rental property. Most of these companies have their own management staff, so when a property or a building is purchased, the property manager who was managing the asset will not be managing any longer.
The boom in technology has helped property managers, but it’s also helping landlords manage their own homes. They can use a lot of the available platforms to manage their properties without the headaches they had in the past. Property managers may be losing doors because of this trend.
Finally, the challenge of affordability is hard to overcome. Jeff has seen a lot of investors in the Bay Area selling their single-family homes and putting their money into smaller markets where there’s a higher yield.
This is one of the reasons there’s an increase in renters. Homeownership is dropping off in a lot of markets because even though rents are high, it’s still more affordable than buying a home. This is especially true in primary markets like San Francisco, Boston, New York, Los Angeles, and Chicago. Tenants are paying more than 30 percent of their income for rent, and there’s an increase in roommate situations. Property managers must prepare for this trend.
Technology Trends Change the Marketplace
While a lot of tenant retention is faltering because tenants are moving for jobs, you also have renters who don’t have to move because they’re working remotely. Someone can work for a company that’s based in San Francisco, but live in a more affordable and more remote community because they work from home. The internet is reliable, and software has kept up with demand. Cloud computing and video conferencing make everything possible.
Technology also helps investors search for secondary or tertiary markets when the primary markets seem out of reach. People are comfortable buying property they’ve never laid eyes on because with a good partner in the local market, they can see photos and read inspection reports.
People can live where they want. Millennials who want to live in New York or San Francisco can do so by renting their home there. Then, they can buy in other markets like Portland or Austin or Omaha if they want to start building wealth with real estate investments.
Indianapolis, for example, has properties for less than $150,000. The city has a great airport, a good economy, and a professional sports team. It’s an excellent investment idea.
The Changing Market: Then vs. Now
People think of real estate in a different way now than 10 or 15 years ago. The American dream has changed. A house with a white picket fence was once the dream, but now, people want to pursue their passions. This has led to specific changes around how people approach the markets.
Everyone now has the opportunity to live where they want to live. Most people are comfortable renting as long as they’re in the city or the town where they want to be.
In primary markets, Baby Boomers are looking to exchange their homes for convenience. They are usually more affluent than other generations, so they’re living in high priced rentals in larger markets with every amenity. They want to be close to airports and museums and restaurants.
In secondary markets, younger generations are looking for good neighborhoods. They still want convenience and shopping and restaurants, but they have less to spend than the Boomer generation.
Economics are changing in every market. Previously, most businesses and companies tended to congregate in big metro areas. Now, businesses are moving out of large cities for many reasons. Markets like Sacramento are getting large companies because they offer lower rents and a business can find better office space for less money. There’s also a large population of qualified labor in secondary markets. There’s a large demand for good workers in San Francisco, but how many of those good workers can afford to live there? Companies are moving to the cities where there’s more affordable housing and a higher quality of life. It helps them retain workers.
Dallas and Austin are now just as big as Silicon Valley when it comes to tech companies.
How to Approach the Real Estate and Property Management Markets
With all these changes, how can your property management company keep pace?
Jeff has a few ways to address that.
First, develop strong relationships with owners and tenants. You want to know what their needs are. Then, you want to address those needs. When you’re constantly communicating with your owners and your tenants, you can keep a pulse on what’s happening.
Go to conferences. Find out what kind of events your local NARPM group is holding. Go to growth summits like PM Grow.
All of these things will help you know your marketplace.
Empower Your Team and Share Responsibility
Don’t forget that you can’t move your property management company through these changing trends on your own. You need the support and the expertise of your team.
Jeff holds monthly staff meetings with his team, where they discuss changes and assign responsibilities. If a new issue comes up, one team member is assigned to research it and share their findings. This allows people to become experts in specific areas, and thus resources for the rest of the company.
Everything is always changing. Jeff’s best advice for keeping up with this is to be empathy-driven and technology-enabled.
If you have any additional questions about property management market trends, contact us at Fourandhalf. We’d love to discuss the changing trends in property management and how a good marketing plan can help you keep up.