Third-Party Management Evolves Despite Challenging Economic Headwinds

by Katie Sloan

Where is third-party management headed? This is a loaded question in 2023. The economic environment alone presents its fair share of challenges. With fewer properties transacting in the student housing sector, operators have been given a slight reprieve from losing [and winning] assignments. But they aren’t resting on their laurels. 

Instead, operators are using this time to hone their craft, and there is much to ponder. Which COVID-19 protocols should remain from an on-site perspective? Should they look at centralizing some processes? And how can the implementation of AI help streamline processes without taking away the personal element? All of these questions — and more — are currently being assessed by third-party managers heading into the all-important turn season this summer. But unlike the temperatures outside, operators are keeping their cool with a focus on what they do best — customer service. 

Meeting Current Challenges

The sector — and commercial real estate at large — is facing a number of hurdles, many of which are being exacerbated by the looming turn cycle. “It seems each year, finding skilled temporary labor or turn vendors is challenging,” says Tadros ‘Teddy’ Abdelmalek, national director of business development with Campus Life & Style (CLS). “Usually, skilled labor costs a premium, so you continually try to find vendors that are highly skilled and economically priced. However, they don’t remain secrets for long, and then their prices start to reflect demand, and the cycle continues. Some of the tools we use to correct this are scouting early and using our facilities team and leadership to ‘plan, plan, plan,’ before we execute.”

Today’s exigent economic environment is also shaping third-party management, chiefly from a transactional standpoint. “If our clients are not able to buy in the current environment, it impacts our business,” says Casey Petersen, chief operating officer at PeakMade Real Estate. “At the same time, fewer of our clients are sellers in this environment, so there are fewer properties exiting our platform.” 

But with this challenge comes the opportunity for introspection. “We have used this time to focus on optimizing and evolving our business model through centralization and technology,” Petersen continues. “We believe that the economic environment for deal flow will improve in the next year. Regardless of the timeline, we are confident that the investment in out platform and the resulting efficiencies in property operations will put our clients in a great position to be competitive buyers.”

Asset Living has also taken this time to refine its business practices, according to Executive Vice President Jason Fort. “We have a dedicated team that puts an underwriting model together for any deal that is on the market, and we will send it out to current and prospective clients that we feel are a fit,” he says. “We’ve gotten a lot of positive feedback, and once the economic tides start getting closer to normal, we as a company think that it’s going to help that we were proactive during this time and that we took the effort to underwrite each of these deals for our clients.”

Today’s inflationary economic conditions are also putting a strain on property financials, requiring owners and operators to implement lean and efficient strategies at the site level, according to John Rabold, chief development officer with Granite Student Living. “We’re very focused on the property’s net operating income (NOI),” he says. “If that isn’t a positive outcome for the owner, then no one wins. It’s also not only about interest rate movement — all costs are inflating. Rent roll increases won’t solve all of your NOI problems.”

But for many of the challenges encountered by student housing operators, the solution comes down to having the right people, according to Bryan Shelangoski, managing director of real estate operations with Greystar. “If you have the right people on your team, specifically on the on-site level, then everything else will fall in line,” he says. “There are external factors like the market, rents and what the community looks like in terms of type of asset, facilities, etc…. But if you have the right people, you can overcome some if not all of those hurdles.”

Today’s Trends

Centralization of leasing and management is going to be a big part of the way the student housing industry operates in the future, according to Jenn Cassidy, senior vice president of student housing operations with Cardinal Group. “We have already begun the process of centralizing certain tasks that previously were done predominantly on-site,” she says. “We have accomplished this through the use of AI tools in conjunction with centralized team members. As we continue to evaluate the trends of our residents, we recognize the importance of meeting the customer where they are at — whether that means answering a question about an outstanding balance after office hours or being able to book a tour on a holiday when the office is closed.”

But centralization in student housing is likely to have a varied definition from operator to operator, according to Adam Byrley, chief operating officer with The Preiss Co. “My belief — and the direction of my organization — is that centralization in the short-term is going to be more heavily focused on operational tasks such as rent collection and reporting,” he says. “This will help reduce site personnel costs and drive NOI in the face of other sharply rising expenses, like insurance and turn.” 

And while centralization offers a good number of positive attributes, it also has its drawbacks. Some in the industry are concerned that with centralization — at least from a leasing standpoint — comes a less customer-friendly environment, according to Greystar’s Shelangoski. “I think there are ways around that issue, and companies that have started trending towards centralized leasing have done a good job addressing that issue, but it is still a concern that we’re seeing,” he says. “If and when that concern is alleviated or eliminated, I think you’ll see a lot more companies go down that road more heavily. But that is one of the biggest fears out there. If you centralize leasing, are you going to be less hands on? Not as malleable or adaptable to the needs of the market?”

The implementation of new technology is another trend that continues to make waves in the industry — the adoption of which was greatly accelerated by the COVID-19 pandemic, according to Abdelmalek. “During the pandemic, we implemented contactless check-ins for move in and virtual tours, and it helped reinforce digital payments,” he says. “It also made online lease signing the normal standard, which CLS had already done prior to COVID. These technological advancements have provided convenience and improved efficiency even after the recovery from COVID-19.”

“From an operational efficiency perspective, a lot of really good things came out of the pandemic, particularly as it relates to the optimization of turn,” agrees Fort. “We’ve been utilizing technology to really push us to another level. But there is also a negative to this, and it’s that during COVID we relied so much on technology that we have to get back to the way we were before with customer service and the in-person experience, which people really need. It’s about finding a balance between the two.” 

The utilization of artificial intelligence (AI) has also become a hot topic of late. “AI has the potential to significantly impact and enhance different aspects of the leasing process and management practices,” says Abdelmalek. “AI can analyze data and patterns to identify potential leads and target specific demographics more effectively. By analyzing online behavior, social media activity and other data sources, AI can help optimize marketing strategies and deliver personalized content to attract prospective tenants.”

PeakMade is also rolling out test pilots for leasing and rent collection modules that utilize AI, according to Petersen. “We will be working to fine-tune the use of AI in our business to optimize performance,” he says. “It is hard to imagine a scenario where AI will not play a big role in our processes going forward.”

Cassidy agrees, noting that Cardinal Group has also adopted AI practices, specifically in the areas of accounts receivable, lead nurturing and lead conversion. “I absolutely believe AI will play a part in leasing and community operations,” she says. “Technology is advancing at a rapid pace and we have all become accustomed to encountering it in our daily lives. It is no surprise that the advancement of technology has led to tools that allow us to adopt more efficient and successful workflows. Our goal is to ensure our prospects and residents have an exceptional experience, and thus far the technology has proven to enhance the customer experience and provide exceptional results.”

But the human and in-person element is still going to be a major factor in the third-party management business, according to Jake Jarman, president of Redstone Residential. “AI is not going to go away, and I am excited for that, but I truly believe that the human component has to remain,” he says. “Even though I enjoy using AI, when I call Delta about my flight, I don’t want to speak to a robot. I want to speak with someone that can empathize with my situation, and it’s no different in student housing.”

“All of our sales are built on relationships and I don’t think that is going away anytime soon,” Jarman continues. “Even if it goes away for some, the last piece of the sales process to go, which I will fight for, is the relationship piece. In reality, relationship typically trumps everything. And that’s what we want for our residents; to have that relationship with their site team and the maintenance team. Until we have fully autonomous robots that come and fix maintenance issues, AI really can’t take over that portion. The customer service piece that cannot be replicated by AI is really what sets apart the winners and losers in third party management.” 

Looking Ahead

When asked to predict the road ahead for third-party management, many noted the likelihood of consolidation within the space. “Equity partners that have had multiple third-party operators in the past will likely begin to consolidate their portfolios to a single operator,” says Byrley. “It makes sense and is much more efficient for many of the larger institutional investors.  Additionally, as the operating environment becomes a bit more normalized over the next year or two, operators that can still drive NOI when top-line revenue growth is closer to normalized levels will be a hot commodity.”

“We’re seeing the consolidation of some of the larger third-party property management groups and with that consolidation comes some unique challenges, especially for those who are smaller,” agrees Jarman. “But it also creates opportunities for smaller groups. There are clients that want a boutique experience with the CEO of the company on speed dial. Just like with any industry, you start to get the powerful giants in the industry that tend to suck up everything, but it does create an opportunity for smaller companies to find their way and continue to grow. We’re going to continue to see these giants in the industry continue to become big, but as they take their sights off some of the smaller opportunities, and that is where we will see some of the newer players flourish. I’m excited. It creates new competition and opportunities for me to learn from not only the giants but these new gazelles that are up and coming.” 

The continued adoption of centralization across the industry is also expected to grow more prevalent over the next few years. “The centralization of operations has been a long time coming,” says Rabold. “In the past, we struggled to understand why some of the properties we became familiar with were so heavily staffed. It simply didn’t make economic sense to us. I believe third party management — when done well — is the most critical piece to the financial success of property owners. Being able to rely on a competent organization to manage your property not only brings financial gain, it can bring peace of mind and added bandwidth for groups to focus on doing more deals.”

“I am very excited to see the operating model changing with the introduction of new technologies and centralized resources,” agrees Cassidy. “We have seen a familiar operating model on-site for a very long time and I believe that will shift rapidly over the next few years.  Being willing to embrace change will allow us to operate in a way that proves better for our residents, teams, and clients. I am most excited for the way the industry has partnered post-pandemic to focus on the mental wellness of our residents and teams.  I believe we will make great strides in the coming years to provide resources to our residents and teams that support positive mental health and access to support to those that need it at a critical time in their lives.”

Others agree offering mental health and wellness support for students is a trend to watch. “Student housing operators are incorporating initiatives to promote mental health awareness, provide access to counseling services and create spaces that foster well-being,” says Abdelmalek. “These efforts aim to address the unique challenges students face and support their overall well-being.”

Katie Sloan

This article was originally published in the May/June issue of Student Housing Business magazine.

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