Over the past year, Multifamily Dive has talked to more than 20 apartment executives to understand how the industry views centralization and how companies are adopting it. In the coming weeks, we’ll post a series of stories from those interviews. For the third installment, we’re looking at how the REITs have led the way. Click here for the first installment and here for the second installment.
Equity Residential’s star leasing assistant, Ella, has amazing performance, engaging with 600,000 customer inquiries, sending 2 million responses addressing prospect questions, and booking over 80,000 appointments in 2023.
How is Ella so efficient? Well, for one thing, it isn’t human. It’s artificial intelligence.
Describing Ella on the Chicago-based REIT’s first quarter 2024 earnings call in April, EQR Chief Operating Officer Michael Manelis said the company also was testing out an AI resident assistant in Q2 to help renters around the clock with common questions about their community service and even their account statements.
“Leveraging this type of automation at the top of our demand funnel has been incredibly effective, allowing us to be nimble with increasing initial traffic demand without impacting our remaining on-site employees' ability to provide high-touch customer interactions when needed,” Manelis said.
In addition to being extremely efficient, Ella is a reminder of how public apartment firms have led the push to centralization over the last 15 years. While some private companies have recently begun doing things like moving assistant manager roles offsite, REITs have been employing this strategy for a long time and seeing strong results. But despite facing an uphill battle, third-party managers are embracing centralization in their own way.
Found efficiencies
EQR isn’t the only REIT pushing centralization initiatives.
Highlands Ranch, Colorado-based UDR has more than 30 properties in its portfolio with no staffers on site. The REIT continues to look for ways to boost efficiency. UDR Senior Vice President of Operations Mike Lacy said it has a list of about 60 initiatives that it is assessing.
“We are constantly trying to figure out which ones to move the dial on and where we should put our efforts,” Lacy said on the company’s Q4 2023 earnings call in February.
Arlington, Virginia-based AvalonBay Communities also has properties without staffers on-site under its Kanso banner while also establishing a centralized service center 17 years ago that has provided back-office administrative support services to its communities and other apartment firms, such as Atlanta-based Gables Residential.
AVB also employs a “neighborhood model” that allows the company to group up to five properties, or up to 1,500 units, under one neighborhood manager and service team.
“It’s not just about management sharing. A whole team is sharing work across it.”
Michael Coyne
AvalonBay Communities' vice president of operations
A neighborhood is larger than a pod, which might have 600 to 700 units, Michael Coyne, AVB vice president of operations, told Multifamily Dive. “It’s not just about management sharing. A whole team is sharing work across it.”
AVB is still innovating on the leasing side, supplementing its centralized teams with digital leasing and renewal tools.
“Historically, our centralized support was mostly for back office activities, like billing and things like that,” Coyne said.
The results
All of these initiatives seem to be paying off. In the recent round of Q2 earnings calls, many REITs outperformed due to lower-than-expected same-store expenses. Although relief in insurance costs and property taxes played a role, efficiencies gained through centralization also beat estimates.
AVB’s payroll costs declined year to date and are expected to grow at roughly 1% for 2024 due to a reduction in on-site positions, Sean Breslin, the REIT’s chief operating officer, said on the earnings call. He indicated payroll cost growth was well below the average merit increase of approximately 4%.
“These reductions relate to the enhanced efficiency of our teams, which is supported by our digital efforts and enabled by our new labor strategy,” Breslin said.
EQR produced less-than-expected same-store expense growth of 2.7%. Its executives attributed those reductions to its use of technology and pods of properties that share resources. As it adds properties in its expansion markets in the Sun Belt, the REIT sees opportunities for more efficiency.
“Clearly, you see [the benefits of pods] show up in our payroll growth numbers, and that is what we would expect going forward in those expansion markets,” Manelis said. “But there are also opportunities in the service side of the business, as we think about leveraging resources differently, that take our dependency off of third-party contractors that kind of keeps that repair and maintenance number down.”
Vertical integration advantages
When it comes to investing in the technologies and processes necessary for centralization, the REITs have inherent advantages.
“[Centralization] is a big expense, but you can potentially amortize that expense over your portfolio over a much longer timeframe [if you’re a REIT] because you're planning to own assets for five to 10 years,” said Sam Tenenbaum, the head of multifamily insights for Cushman & Wakefield, which operates 182,000 units across the country.
Larger private institutional owners who operate their own properties are also adopting many technologies. “Geographic density and scale, obviously, are an advantage for the REITs, but that could be an advantage for large private players, as well,” Coyne said.
For third-party managers on short-term contracts, on the other hand, it’s often hard to have the certainty to make significant investments in centralization.
“I think the REITs are ahead of the third-party managers,” said Woody Stone, president of Dallas-based Cushman & Wakefield Multifamily Asset Services, pointing out that third-party managers don’t control the real estate. “We don't have some of the resources that a completely vertically integrated organization could apply.”
Third-party managers also report to many different owners, who are ultimately the bosses. Some groups may embrace centralization, while others prefer a more old-school approach.
“It's complicated as a third-party manager with 200 different clients.”
Woody Stone
President of Dallas-based Cushman & Wakefield Multifamily Asset Services
“It's complicated as a third-party manager with 200 different clients,” Stone said. “Not everybody sees it the same way. So, trying to scale a solution is challenging as a third-party manager.”
But that doesn’t mean centralization can’t make sense for private third-party operators. They just might have to be a little more strategic in how they approach it.
“I think there are commonalities across the industry,” Stone said. “We're trying to focus on those commonalities of best practice, but I think that it will look different than some of the REITs would approach it.”
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