Distress is rising fast in today’s multifamily market, and owners and
operators face challenges not seen in years. The national distress rate
for multifamily properties, which includes delinquent and/or specially
serviced loans, stood at 8.4% in July, more than triple the 2.6% rate
reported in January, according to CREDiQ, which tracks all commercial
real estate loans securitized with CMBS financing. The multifamily
sector is now the third most-stressed real estate asset class, following
office (12.2%) and retail (11.8%) and surpassing hotels (7.8%) last month.
There are several reasons for this sharp rise in multifamily distress,
including maturing construction financing from the zero-interest rate
period forcing landlords to refinance into much higher rates, if they can
refinance at all. Surging operating costs such as insurance premiums and
overbuilding in some markets are also taking their toll.
But my company, Lynd, firmly believes that downturns are where
fortunes are won (and lost), and there is an abundance of opportunity
in the current cycle. That’s why it’s important to choose a multifamily
property manager that knows how to navigate these cyclical challenges.
Here is our playbook for turning around distressed multifamily properties.
Step One: Diagnosing the Problem
The first step to turning around a troubled asset is conducting a thorough
and objective assessment of the property. As with a real estate acquisition,
our due diligence includes researching the property’s location, expenses
and revenues, physical condition, position in the market compared to its
competitors and overall operating performance.
A property must be viable for us to take it on for property management,
something that’s not always easy to distinguish for inexperienced
managers. We’ve seen Class A+ multifamily properties fail because of
mismanagement, and Class B and C properties that were run well but were
undercapitalized and needed value-add renovations to be competitive in
their market. We have the experience to identify issues and the resources
to assess quickly, formulate and execute the strategy to lead to great
results.
Step Two: Prescribing an Operational Overhaul
Multifamily property management encompasses a lot, including
marketing, resident acquisition and retention, rent collection,
maintenance, financial management and more. We look at all of these
factors to prioritize what needs to be done to improve the asset.
The Need for Good Data
In our approach, data is crucial in ensuring good operations, and we set up and implement systems to capture crucial data throughout the operation. Before returning to Lynd in my current role, I worked in Mexico at what was effectively a private equity startup in the multifamily space. We emphasized openness and collaboration across our portfolio in our operations, with a focus on collecting and harvesting data and sharing it across company divisions, an approach I’m bringing to Lynd. It ensures alignment on budgets and de-risks the entire platform, as well as better informs the opportunities we pursue and those we let die on the vine.
With regards to data, there are some key factors “under the hood” that
we prioritize. One is controlling expenses, especially payroll, insurance
and contract services. These make up the bulk of operating management
expenses at any site and can largely be controlled. For example, often we
can cut contract services by 20% without impacting resident services.
Retaining and Attracting Residents
Resident acquisition and retention are also crucial. We talk to residents
and get their sentiment. Why did they choose to live there? What were
their expectations and what has been their experience? What needs to be
improved?
Especially at a distressed property, retaining existing residents is
as crucial as attracting new ones. Enhancing customer service and
responsiveness to maintenance requests can significantly improve
tenant satisfaction. We regularly reassess lease terms to ensure they
remain fair and competitive, which might involve renegotiation to better
meet residents’ needs while still aligning with property goals.
Offering move-in incentives or flexible leasing options can also be
effective, particularly when combined with targeted marketing efforts
aimed at the specific demographics you wish to attract.
Creating a sense of community is key to resident retention. We foster
connections among residents through organized events or communal
spaces, which can enhance their overall living experience and reduce
turnover. By focusing on both the satisfaction of current tenants and the
attraction of new ones, you can create a vibrant, thriving property that
stands out in the market and ensures long-term success.
Always with residents, it is crucial to be personable and congenial; it’s
part of their experience. Which brings me to a broader point, which is the
importance of the human element in effective property management on
a distressed asset.
Property Management Is a People Business
That includes staff. Front-line staff are the backbone and heart and soul
of a successful multifamily property. Property management is not easy.
You’re satisfying an essential need for the renter, and it’s important to
have employees who genuinely care, have opportunities for development
and are appreciated. What a fulfilled employee will do is exponentially
more productive than what a disgruntled employee will do, and they are
crucial to a positive tenant experience in all types of properties.
Get the Financial House in Order
In today’s volatile market, it’s also crucial to reassess the financial setup
of your properties to ensure long-term stability. We start by evaluating
existing debt structures and opportunities for refinancing. Adjusting
these financial levers can create a more resilient portfolio.
Through strategic financial restructuring—whether it’s optimizing
debt terms or securing advantageous refinancing—you can create the
financial stability necessary to weather current challenges and set the
stage for recovery. This proactive approach not only safeguards your
assets but also positions your property for sustainable growth in the
years to come.
Step Three: Undergoing Physical Therapy
Some multifamily properties will require capital improvements – from
lobby or other common space renovations to unit upgrades – to be
competitive in any market. To draw in new residents, we might upgrade
amenities, such as adding modern fitness centers or co-working spaces,
which can distinguish a property from its competitors. But whether
you’re a homeowner or the property manager of a 500-unit building, a
key question is how to prioritize capital expenditures that add value to
your property without overextending it financially. The trick is to make
sure you spend enough but not too much to get payback over a reasonable
time. To do this, we identify the value-add upgrades that are most
desired by the target tenant base and directly enhance the quality of the
resident experience at the subject property. Renters are most willing to
pay more for the enhancements/upgrades that enrich their daily lives vs.
occasional use.
Conclusion
The multifamily market is undoubtedly in flux, but this period of change
presents significant opportunities for those prepared to adopt a strategic
approach. By carefully assessing current property performance,
overhauling operational inefficiencies, revisiting financial structures
and focusing on tenant attraction and retention, property owners can not
only weather the storm but position themselves for long-term success.
At Lynd, we’ve seen firsthand how these strategies can stabilize properties
and drive recovery, even in the most challenging environments. I
encourage you to reach out to experienced property managers that can
implement these approaches tailored to your specific needs, ensuring
your property remains competitive in an uncertain market.
Josué Garza rejoined Lynd in April 2024 as president of property management
as the firm looks to expand its third-party property management portfolio,
currently 22,000 multifamily units across 20 states. Garza has 14 years’
experience in property management, most recently as director of property
management at Gran Ciudad, a Mexico City-based privately held affiliate of
Black Creek Capital that develops, owns and operates multifamily housing
throughout Mexico. Garza’s previous role with Lynd involved overseeing
rental properties in Texas, Arizona, Colorado and California. He holds a
B.A. in real estate finance from the Rawls College of Business at Texas Tech
University