There is little good news in the Colorado apartment industry, as all indicators point to a challenging market for at least the next eighteen months. Are we at the bottom yet? Only time will tell, but there is little reason for short term optimism as low interest rates, negative job growth and excessive new construction are not expected to improve anytime soon. So, what’s an owner to do? Increasing revenue is difficult given the large amount of concessions prevalent in today’s market, thus controlling expenses is critical to minimizing the impact on the bottom line.

The good news is there are numerous ways a property manager can lower costs, without affecting the overall performance of the asset. The simple process of bidding all projects, coupled with the art of negotiation can produce dramatic reductions in costs.

The Bidding Process:

The best way to know if you are effectively managing expenses is to bid all outsourced work, whether it’s a large capital improvement project or a more common expense such as carpet replacement. For capital projects, procure a minimum of three bids and ensure a detailed scope of work is completed so that all bids are “apples to apples”. Competitive bidding prompts vendors to “sharpen their pencil” and can provide insight into what charges are buried in their pricing. For smaller, continuous projects such as carpet replacement, a minimum of three vendors should be contacted during the budgeting process. Total cost for carpet, installation and pad replacement can vary by as much as $3 / yard by vendor. Through bidding, if a 200 unit property with a 65% turnover can reduce their cost by $3 / yard, the annual savings could be as much as $27,000.

Negotiation:

There’s no time like the present to negotiate, no matter what you are purchasing. Simply asking the vendor “Is that the best you can do?” often times results in lower pricing. ALWAYS ASK THIS QUESTION!!! Getting the management team in the habit of asking this question can save thousands of dollars! As an example, do you know how much your property is paying per yard for trash removal? Is it the best price available? I’ve saved more than $64,000 per year (for 14 properties) based on negotiating this often overlooked expense.
For your reference, the best rates I’ve seen in the Denver market for a reputable waste removal company is $1.38 / yard. The formula used to calculate cost / yard is:

# of containers X # of yards per container X # of pick-up’s per week X 4.33 = # of yards of waste removal each month

Scrutinize All Expenses:

Ensure that each component of every budgeted line item is analyzed for cost effectiveness. Analyze every invoice paid and ask: Can the property save money by doing this another way?; Are there any charges on the invoice that weren’t negotiated or agreed to? Have the prices been negotiated? Is there anything on this invoice that the maintenance staff could perform in-house?

Utility expenses can be reduced substantially by offloading a portion of the expense to the residents. To compensate for rising water and sewer costs, many owners and managers are turning to submetering and ratio utility billing systems (RUBS). If you are not using some sort of system to reduce utility costs (water, trash and sewer), the potential annual savings in converting to one of these systems is substantial.

According to a recent report prepared by Apartment Appraisers & Consultants of Denver, the annual average cost per unit for expenses in the Denver Metro Area for 1990-2003 construction is $3,674 as outlined below:

No. Units

Avg.
Size

Admin.

Insurance

Maint.

Mgmt.

Payroll

Taxes

Utilities

Total

Total /
Sq. Ft.

298

921

$465

$203

$531

$397

$981

$675

$422

$3,674

$4.04

You can use this as a starting point when reviewing the costs / unit for your property. Keep in mind that Taxes and Insurance are not necessarily uncontrollable expenses, as Insurance should be negotiated annually and Taxes should be appealed whenever appropriate.

The downturn in the economy has made managing multifamily assets an arduous task and heightened the focus on controlling expenses. By focusing on continuously and aggressively scrutinizing expenses, biding projects and negotiating effectively, cost reductions will follow.

Office 303.730.0361   Fax 303.265.9806   Mobile 303.921.3889

dstrong@multifamilysa.com

 

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